From survival to prosperity: European leveraged finance looks to the future | White & Case srl


  • Leveraged loan issuance in Europe increased by more than a quarter, year-on-year, to €289.7 billion in 2021
  • High-yield issuance reached €148 billion in 2021, up 47% from 2020 (year-on-year)
  • Refinancing accounted for about half of all leveraged loans and high yield bond issuance for the year
  • M&A and buyouts saw double-digit year-over-year increases in deal-related emissions

European leveraged finance markets came back to life in 2021, boosted by a combination of attractive pricing in the first half and buoyant M&A activity in the second half. The result? High volumes of refinancing and issuance of transaction-linked leveraged loans and high yield bonds in Europe. And the momentum behind those double-digit gains is set to continue into 2022.

Leveraged loan issuance in the region increased by 28% in 2021 to €289.7 billion from €227 billion in 2020, putting the market on pace to reach full annual value the highest for the issuance of leveraged loans on By debts registration.

European high yield bond markets were even more buoyant, with issuance for the year amounting to €148 billion, up 47% from the €101 billion posted in 2020 and topping yearly highs dating back to 2015 at the end of the third quarter.

Is this explosive growth likely to continue in leveraged financial markets in 2022?


The increase in leveraged loan issuance in 2021, year-on-year

Business remains robust, even with significant headwinds

Leveraged finance issuance continued to rise through 2021 despite the emergence of several challenging factors, including new variants of COVID-19, rising inflationary trends (and the specter of rising rates of interest), supply chain disruptions and shortages, elections in France and Germany and post-Brexit trade and security tensions between the UK and the EU.

While the increase in overall debt issuance indicates a stable and more predictable market, the motivations of lenders and borrowers have pivoted over the past 12 months. As 2022 dawns, the continued evolution of these motivations is somewhat difficult to pin down, although the shift in direction is clear. The drivers of issuance have effectively shifted from survival mode (refinancing) to prosperity mode (M&A and buyout issuances).

After nearly two years of doing business in pandemic-induced quicksand, many companies have finally found their footing and are focused on growth.

View Full Image: European Leveraged Loan Pricing (PDF)

Pricing of European High Yield Bonds — Fixed Rate Bonds

View Full Image: Pricing European High Yield Bonds — Fixed Rate Bonds (PDF)

Refinancing paves the way for stability in 2022

In the area of ​​leveraged loans, refinancing activity dominated issuance in the first two quarters of 2021 as borrowers decided to cut the cost of the most expensive debt, including that incurred during the first series of blockages related to COVID-19.

A decline in average prices for prorated loans and institutional loans – from over 4% in Q4 2020 to less than 4% at the end of Q2 2021 – led to a flurry of opportunistic activity, with issuers rushing to get attractive rates.

The high yield market followed a broadly similar trend, with prices in the first and second quarters falling below the 4% threshold.

The scale of refinancing issuance in the first half of the year was such that it accounted for around half of all leveraged loan and high yield bond issuance in 2021. This despite a significant slowdown in refinancing in the second half of the year, which was characterized by rising prices. For leveraged loans, the average spread on senior institutional debt increased from 3.71% in Q1 to 3.89% in Q4, while the weighted average yield to maturity of fixed rate bonds fell from 3.87% in Q1 to 4.69% in Q4.

This decline in refinancing weighed more heavily on the leveraged loan market. After a summer break, institutional shows failed to keep up with the pace set earlier in the year, with August, September and October ranking among the slowest months for shows in 2021.

Discounts on Original Issues (OID) in Europe

View Full Image: Original Edition (OID) Discounts in Europe (PDF)

Funding for M&As and buyouts intensifies

While higher prices deterred opportunistic refinancings, buyouts and M&A issuances in Europe gained momentum throughout the year, even though the weighted average margin of M&A facilities and repurchase exceeded the price thresholds seen at the height of the pandemic.

In 2021, the value of mergers and acquisitions in Western Europe reached its highest level since the global financial crisis as dealmakers caught up with delayed deal times.

High-yield bond issuance, in particular, saw renewed activity in the final months of the year. LBO financings for Business Integration Partners, Keepmoat, Arrow Global, Agrifarma and Polynt-Reichhold, as well as buyout M&A deals, such as MÁSMÓVIL, Multiversity and Cerba HealthCare, have seen high yield bond issues linked in the October operation reach more than 10 billion euros. The fourth quarter of 2021 accounted for more than a third of all high-yield buyout and M&A bond issuance during the year (€33.2 billion).

This flurry of activity at the end of 2021 saw year-on-year high-yield bond issuance in Western and Southern Europe rise 53% to €17.8 billion for M&A without redemption, while redemption-related issues more than doubled to €15.4 billion.

For leveraged loans, year-on-year figures saw a 19% increase in buyout-free M&A loan issuance to €54.9 billion, with buyout issuance up 81 % to 66.7 billion euros.

With sponsors and companies sitting on record amounts of dry powder in the form of cash reserves and ongoing M&A activity, the first quarter of 2022 is shaping up to be a steady flow of funding.

In particular, M&A and buyout activity should continue to drive issuance in 2022, with a strong deal pipeline in place. Significant financing planned for 2022 includes a planned €5 billion loan to finance the merger between automotive suppliers Faurecia and Hella.

Benchmark floors on institutional term loans

View Full Image: Institutional Term Loan Benchmark Floors (PDF)

Active but choppy markets could be on the horizon

In addition to the full M&A pipeline, other notable factors are expected to influence leveraged finance deals in the coming months. For example, borrowers now have more financing options. Record levels of CLO activity in November drove new CLO issuance up 75% year over year, heralding another powerful year for debt market activity.

It was a similar picture in the European direct lending space. The past 12 months of robust deal flow, fundraising and issuance has confirmed the maturity, resilience and credibility of the industry, which is now set for growth through 2022.

The fundraising figures alone reflect the industry’s increasingly confident position as a stable asset class offering solid returns. According to data from By debtsthe targeted direct lending fundraising activity in Europe in the first half of 2021 had already exceeded the total for the year 2020. By the end of the year, it had reached 36.2 billion euros.

At the same time, however, inflation and the threat of higher interest rates, together with higher prices and an increase in the number of flexible agreements in syndication processes, suggest that borrowers and lenders may have to navigate rougher waters as the year progresses. forward.

And then there’s environmental, social and corporate governance (ESG)-related debt, which is another lever that investors and borrowers will need to consider in their plans. According to White & Case’s ESG Leveraged Loan Deal Tracker, ESG-related loans accounted for almost a fifth of all European B term loan issuance at the end of Q3 2021, a fivefold increase from compared to the share of only 4% recorded in 2020.

ESG could serve as an additional incentive for debt issuance in 2022, but it will not be free as the rollout of new benchmarks, including the EU regulation on sustainable finance disclosure and updated sustainability-related lending principles from the European Leveraged Finance Association, introduces greater rigor on ESG finance criteria. Greenwashing and independent verification of ESG performance metrics – both their framing and testing – are likely to be hot topics for ESG bank loan and bond issuances in 2022.

Lenders and borrowers are preparing for another year of intense and dynamic activity, but will need to navigate additional layers of complexity and nuance to stay on top of these fluid market waves.

European leveraged loan issuances by rating

View Full Image: European Leveraged Loan Issuance by Rating (PDF)

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