European leveraged finance: Conclusion | White & Case srl
A flurry of activity has seen year-on-year leveraged finance issuance in Europe hit new highs in 2021. Can this pace be sustained in the months ahead? Based on pipeline activity and investors’ appetite for growth, the answer appears to be: Yes.
The value of leveraged loan issuance in Western and Southern Europe in 2021
As 2022 dawns, there are many reasons to be cautious about leveraged finance in Europe. The economic impact of the latest variant of COVID-19 remains an unknown quantity, inflation continues to climb and higher interest rates look increasingly likely – the UK was the first major economy in the region to raise rates and the EU could follow.
And yet, the leveraged finance business continues to defy expectations. Last year saw the highest annual total value for leveraged loans and high yield bond issues in Western and Southern Europe on By debts registration. Meanwhile, direct lenders raised record levels of funds and deployed them in a record year in 2021, including in the private equity (PE) space where direct lending is increasingly finding of breakthroughs.
As noted in this report, the drivers of this activity were clear. Refinance issuances in the first half of the year accounted for about half of all leveraged loan and high-yield bond issuance. The value of M&A deals in Western Europe has reached its highest level since the global financial crisis, establishing a steady stream of funding that has yet to reach conclusion.
Where does that leave European leveraged funding for the year ahead?
148 billion euros
The value of high-yield emissions in the region in 2021
Focus on future drivers
Several pockets of activity are worth watching over the coming period.
First, M&A activity, coupled with the ongoing private equity buyout spending spree, still has some way to go.
Year-over-year high-yield bond issuance supporting M&A (excluding buyouts) grew more than 50% in 2021, while buyout-related issuance more than doubled. There was also a 19% year-on-year increase in leveraged loan issuances from non-buyout M&As, with buyout issuances up 81%.
Much of this was due to a spike in mega-deals in Europe in 2021, with more than 150 deals worth at least $2 billion and seven worth at least $20 billion recorded l last year, according to Merger market, including the $31 billion combination between Vonovia and Deutsche Wohnen. And where mergers and acquisitions go, emissions follow.
Second, on the equity side, sponsors spent more than US$300 billion in 2021, nearly double the previous year and the highest annual value on Merger market record – a trend that is expected to continue into 2022. Many private equity firms have already raised significant new funds or are in the process of doing so, and these will need to be deployed. All of this is fueling the debt and equity markets and will drive things forward in the year ahead.
And third, while the latest variant of the pandemic will likely continue to influence the decisions of lenders and borrowers, environmental, social and corporate governance (ESG) issues will remain on everyone’s radar. The emergence of ESG financing has created new opportunities for the market and these can be expected to grow in 2022.
For many, it’s a matter of regulation. The EU Sustainable Finance Disclosure Regulation, which entered into force in March 2021, “establishes sustainability disclosure obligations for manufacturers of financial products and financial advisers towards end investors”. More detailed information will be demanded of lenders in Europe hoping to hitch their wagon to the ESG train – any hint of ‘greenwashing’ will not be tolerated.
At the same time, where available, margin clickers linked to ESG or sustainability criteria will offer borrowers a potential way to reduce the cost of debt, especially in the event of rising interest rates. It also allows lenders to expand their yield-seeking net, giving them a way to reduce risk on credits they might not otherwise seek. It is a win-win scenario for both parties that could create a more sustainable financial and investment market.
Lenders and borrowers should prepare for another busy year, but keep in mind that these big waves of activity won’t last forever. Climb them for as long as you can, but be prepared to batten down the hatches for the next storm.