Marlborough Partners, the independent private equity debt advisory firm, today published its report on the European leveraged finance market in Q1 2014.
The report, analysing data from a number of sources, shows that while UK leveraged loan volumes fell in Q1, to €1.6bn from €1.8bn in the previous quarter and €2.7bn same period last year, leverage levels in deals continued to rise. The average total leverage in UK private equity deals concluded in Q1 reached 5.2x compared with 4.8x in the previous quarter. Across the European mid-market (deals with debt below €250m), the average total leverage in Q1 edged up only slightly to 4.5x from 4.4x in the whole year 2013.
Refinancings and recapitalisations continued to drive European volumes. Refinancings accounted for 44% of Q1’s €8.5bn sponsor-backed loans, a record high, up from 32% in the full year 2013. Dividend recapitalisations accounted for 15% of the total, up slightly on 14% in the year 2013. Cross-border financing activity reached a record high of €20.7bn both within Europe and between the US and Europe.
Covenant-lite issuance in Europe from US investors in Q1 stood at 25% of institutional loan volumes (as opposed to 60% in the US). Margin compression has encouraged US investors to look to Europe for enhanced yields, but European market data suggests that the relative value gap is now narrowing. True covenant-lite loan issuance from European investors remains virtually non-existent.
UK spreads continued to fall in the first quarter of 2014 averaging 427 bps on institutional loans, the lowest average seen since 2008. The iTraxx Europe Cross-Over index, a key indicator of market sentiment, continued to tighten in the quarter, settling at 290 bps, in line with the end of 2013.
European high-yield volumes reached €19bn in Q1 2014, the second busiest quarter on record, with double-B rated transactions accounted for the bulk of the total, at 52% a post-crunch high. However, single B issuance and sponsor-backed issuance both declined compared with Q4 2013, down by 25% and 49% respectively.
Marlborough Managing Partner, William Allen, comments: “The reduction in single B and sponsor-backed high yield issuance in the quarter was due to GPs being able to exit some investments through the public markets and, for mergers and acquisitions, opting for bank debt, given lower pricing and less restrictive pre-payment penalties.”
“If the gap between European and US yields is disappearing, we anticipate this will reduce US investor flows into European covenant-lite issues. Extremely long settlement periods on European loan trades and comprehensive transfer restrictions are also playing a part in dampening US liquidity. The market waits to see how this is going to play out.”