European economic outlook

  • Q2 22 has been a challenging quarter for the European debt markets, with the primary market only partly opening toward the end of the period, as investors face increasing uncertainty around inflation, rising interest rates, and the Russian-Ukrainian conflict
  • The primary high yield market closed from February to April 2022, with sporadic heavily discounted issuance through the summer. Total quarter issuance was EUR 4.5BN in Q2 22, well under the EUR 10.8BN of new issuance in Q2 21[i]. Whilst there have been tentative signs of life post the regular August break, we expect investors to remain highly selective, favouring BB issuers in defensive sectors
  • As with bonds, Q2 22 leverage loan volume fell to EUR 9BN (vs EUR 19BN during Q1 22), the lowest quarter on record since the eurozone debt crisis in 2012[ii]. Terms have tightened significantly, even for borrowers in popular defensive sectors, as macro-economic indicators continue to worsen, with many investors modelling a near term recession in both the UK and Eurozone
  • The private debt markets showed more resilience with 235 deals closed during Q2 22, 9% up from Q1 22 (214 deals) and 26% from (Q2 21 174 deals).[iii] Deal activity was driven by the French and UK markets (35% and 29% of total issuance, respectively[iv]), with many lenders taking advantage of the dislocation in liquid markets to deploy large tickets at attractive yields
  • Despite the robust level of activity, we note debt investors are becoming increasingly selective, favouring resilient businesses in defensive sectors with the ability to manage inflationary pressures
  • We continue to see terms and documentation tighten, with margins increasing c.50-100bps, a reduction in leverage multiples (rising base funding costs, increasing the focus on debt serviceability), greater scrutiny on EBITDA adjustments, and higher focus on DSCR / ICR metrics. The bar for IC (Investment Committee) approvals has also moved materially with high diligence demands and longer processes
  • The path to recovery for the functioning loan market remains unclear and will likely depend largely on the effectiveness of upcoming government support across Europe to limit inflationary pressures and ease the cost-of-living crisis. We therefore expect debt market conditions to remain challenging in the near term

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[i] LCD European Quarterly Second Quarter 2022 - Leveraged Commentary & Data | PitchBook

[ii] LCD European Quarterly Second Quarter 2022 - Leveraged Commentary & Data | PitchBook

[iii] The July 2022 DC Advisory Lender Survey - DC Advisory’s independent survey of 93 European banks and direct lenders, which was completed in July 2022 and conducted across UK, France, Germany, Austria, Switzerland, Spain, Belgium, Netherlands and Luxembourg (referred to herein as the “The July 2022 DC Advisory Lender Survey” or the “Survey”). Any such data, including league table data referenced herein is limited to the data provided by the Survey participants and is not meant to constitute definitive market data. The banks and lenders selected for the Survey are based on those that are most active in the market, and that DC Advisory interacts with the most. Accordingly, the Survey participants do not constitute an exhaustive list of banks and lenders who may have been active during the period addressed by the Survey.

[iv] The July 2022 DC Advisory Lender Survey


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