• Led by a global rise in risk consciousness, liquidity and pricing conditions in the European high-yield bond and leveraged loan markets took a downturn beginning the second quarter of 2007. As the quarter progressed, investors began to question spread levels, and their appetites for new issues began to diminish.
• Since the end of the quarter, global credit markets have encountered more contraction, and bids have slowed dramatically. The recent “flight to quality” among credit investors has further reduced market liquidity and increased the difficulty in funding some deals globally. Once conditions stabilise from the current disruption, the important question becomes the longer term commitment to high-yield products by new non-traditional investors.
• Before current market conditions set in, the pace of European leveraged finance (including leveraged loans, mezzanine financing and high yield bonds), increased in the first six months to a estimated EUR 150.8 billion, 12.2 percent than the first half of 2006. Non-rated bond issuance could add as much as EUR 2.1 billion to that total.
• Issuance levels in the first half were driven by balance sheet leveraging strategies, including M&A and especially LBO financing. However, a growing number of LBOs have just been postponed or canceled, including mega deals Chrysler and Alliance Boots, causing lenders to hold large amounts in commitments that may be difficult to sell into the secondary market without taking a discount. Goldman, Lehman, Bear Stearns and Morgan Stanley, for example, are said to be holding roughly USD 180 billion in commitments, although the amount that has already been syndicated to investors is not clear.
• Despite fundamental credit quality metrics that appear benign, lenders and investors are dictating stronger terms as conditions for new deals. The trends toward softer loan covenant packages and increased leveraged has turned.
• European high yield bond and leveraged loan indices registered positive returns through the second quarter on a trailing twelve month basis. Global credit market repricing, especially in the high yield bond markets, trimmed gains late in the quarter, a trend that continued into July.
• Despite a relatively full calendar of high yield bond and leveraged loan transactions planned to support buyout activity, actual deal activity in the second half is likely to be lower.

About the Report

Done in partnership with European High Yield Association (now AFME / EHYA), the EHYA Leveraged Loan and High Yield report is a quarterly report on the trends and statistics of the European leveraged finance market, including both high yield loans and leveraged loans. Issuance volumes, credit trends, global comparative issuance data, market highlights and commentary are included.

Credits

EHYA

• Gilbey Strub

SIFMA Research

• Michael Decker
• Steven Davidson, CFA
• Bryan Gross