Q4 2013 Market Update

Marlborough Partners, the independent private equity debt advisory firm, today published its report on the leveraged finance market in Q4 2013 and an ‘end of term report’ on the full year for European leveraged loans and high yield bonds.

The report, analysing data from a number of sources, shows that UK leveraged loan volumes fell in Q4 to €1.8bn (€4bn in Q3), but that leverage levels spiked in the quarter taking average total leverage on UK deals to 4.8x for 2013, up from 4.5x for of the preceding nine months.

The iTraxx Europe Cross-Over index, a key indicator of market sentiment, continued to tighten in the quarter, falling below 300 bps, down from over 500bps at the end of Q2.

2013 was the strongest year since 2007, with €67bn of senior leveraged loans issued in Western Europe, up from €29bn in 2012. This was largely driven by a significant increase in German volumes, which accounted for 36% of the total, with the UK at 24% and France at 12%.  The UK’s total of €13.7bn in 2013 was the highest since 2008, though still well below that of 2007’s €39bn.

2013 also saw a surge in Euro-US cross border activity at €47bn in the year, compared with €29bn for 2012; the majority of the total (€34bn) was syndicated in the US.

CLO issuance finally took off in 2013 driven by declining AAA paper costs (thus reducing liability funding and enhancing returns on equity).  From zero in 2012, 2013 saw €7.4bn raised from 20 vehicles.  This, together with loan repayments rising, as a result of more portfolio companies being sold and increased demand from non-CLO institutions, has boosted capacity in an already liquid and increasingly competitive market.

Marlborough Managing Partner, Jonathan Guise, comments: “Through leveraged loans and high yield bonds, sponsors paid themselves over €6bn in dividends in 2013, more than twice the amount paid over the 2008-2012 period.  This has attracted some negative commentary, but a sense of perspective is important.  Whilst there were a few eye-catching exceptions, the average dividend recap in 2013 paid 42.5% of the initial equity contribution three years after the original buyout.  Most of these portfolio companies have weathered one of the toughest trading environments for many years, so should be in good shape.”

On the back of a yield-hungry investor base and a period of improving macroeconomic stability, European high yield bond issuance reached record levels in 2013, with total issuance of €70.4bn, significantly outstripping 2010’s previous record of €44.4bn.  Of this total, nearly €26bn was issued for private equity backed deals, including €6.4bn for 13 leveraged buyouts.

Investor appetite for smaller deals strengthened, making high yield more accessible to the private equity mid-market.  In 2013 there were 27 deals of below €200m, of which 10 were below €150m.

The year also saw a steady decline in yields, falling to record levels in Q4 of 7.17% for B rated bonds and 4.34% for BBs.

Another key mid-market trend witnessed in 2013 was a rise in the number of Unitranche financings to 24 from 9 in 2012, reflecting a growing understanding and acceptance of the product amongst European sponsors alongside reducing Unitranche pricing, due to increased competition from providers.

Jonathan Guise concludes:  “We expect to see downward fee and margin pressure on both bank debt and Unitranche continuing into at least early / mid 2014.  We also anticipate banks being increasingly prepared to underwrite mid-market deals and to increase their hold levels to combat declining loan books.

“The extent to which European borrowers look for US financings this year will depend on the relative competitiveness of European investors, which appear to be settling into a covenant-loose world for large deals.  To date ‘cov-lite’ loans have only been accepted on a cross border basis, but it is just a matter of time before we see a fully European ‘cov-lite’ syndication.”

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