"It's like déjà vu all over again" is the famous quote attributed to Yankees star Yogi Berra. The quote seems to sum up the current state of debt markets which have kicked off with a flourish reminiscent of the glory days pre the credit crisis.
March 2017 saw the largest volume of monthly loan issuance since 2007 boosting total loan volumes to €33.8billion of 1Q2017. Much of the supply was directed at repricings, 60% of volume, while recaps and refinancings also proved popular as issuers and arrangers, conscious of the looming French elections, capitalised upon voracious demand from the buy-side. Strong issuance in the high yield bond market and increasing competition from direct lenders meant that margins were extremely miserly and a few deals priced below re-offer post issuance.
The high yield bond market also started 2017 with a bang seeing volumes of €23.8 billion from 60 transactions in 1Q2017; the third best start to the year since 2006. While loans dominated the single B space, much of the issuance has been in BB territory. Paper has been being written at tight spreads across the credit spectrum with Play’s €500 million PIK Toggle (B-/Caa1) priced at 5.375% fixed being an excellent example. Veralia returned to the market to relaunch a PIK Toggle (pulled last October) providing further evidence of strong primary demand.
Loan documentation continues to bifurcate with larger syndicated loans increasingly mimicking high yield indentures; covenant lite and covenant loose deals continue to dominate the market whilst grower baskets have become de rigueur. Freebie baskets continue to gain traction and, more recently, issuers have begun to push back on MFN status a trend reflected in claw-backs in the bond markets.
Direct lending continues to make strong headway in the core European markets of UK, France and Germany whilst gaining traction in Scandinavia, Italy, the Netherlands, Spain and Ireland. Regulatory changes in France, Germany and Italy, facilitating direct lending to corporates, will accelerate penetration in those markets and the ECB’s proposed guidelines on leverage (expected mid-2017) will hobble banks and provide further boost to direct lenders if they are introduced without significant amendment. Unlike the U.S., direct lenders have made slower progress in the non-sponsored corporate market but issuance in this segment has also seen growth. The last few months have, however, witnessed capital formation by funds which can accommodate lower returns aimed squarely at the non-sponsored segment. At the same time funds are able to provide increasingly smaller tranches as low as €7m. This should prove good news to SMEs who, hitherto, have been dependent primarily on traditional banks and these developments could galvanise this segment which remains above the threshold of peer-to-peer financing but lacks access to alternative forms of funding available to larger firms (e.g. bonds). At the larger end of the spectrum, Polynt’s €625m unitranche from GSO and the more recent £475 million unitranche financing Bridgepoint’s acquisition of Zenith in confirmed that direct lending now competes with head-on high yield bonds whilst the recent redemption of Soho Houses’ high yield bonds, with a £275 million unitranche, reinforces that notion.
Junior debt has enjoyed mixed fortunes over the last year; Mezzanine continues to face pressure from other cheaper products (2L in larger deals and unitranche in smaller deals). Despite this global mezzanine funds have raised very large amounts of capital over the last year (GSO, Highbridge, Prudential and Crescent together raised nearly $20 billion). Competition from competing forms of capital means it is less likely these funds will be deployed in entirely conventional structures so these lenders have had to evolve new strategies to deploy their funds. The Second Lien market experienced a resurrection in July 2014 (after a nascent period post 2007) and, according to S&P, is expected to experience a renaissance in 2017, for a number of reasons however issuance has remained sporadic. Smaller-than-usual tranches have also appeared, such as Photobox’s €40m 2L. PIK has been the brightest spot and has seen a number of large, high profile deals with Play’s €500 million PIK Toggle (B-/Caa1) priced at 5.375% fixed being an excellent example while, further evidence of improving demand was Veralia’s PIK Toggle, relaunched successfully having been pulled last October.
Contrary to conventional wisdom, Asset Based Lending has not made as much headway as expected although issuance continues to increase steadily as banks swim against the regulatory currents, which makes RCFs unattractive. Despite this, ABL must gain acceptance as regulatory pressures make RCFs uneconomic for banks and canny borrowers begin to recognise the benefits of this product with Game Digital’s recent £100m line being an excellent illustration of the benefits of this type of financing.
The markets are finely poised and face a multitude of macroeconomic and political uncertainties. As in previous years we have assembled an expert panel of speakers from a raft of blue chips firms who will discuss current trends and future developments.
I look forward to welcoming you on the day to what, I am confident, will prove another invaluable point of reference for those active in debt markets.
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