European leveraged loans rocket in Q1 on back of favourable terms

UK loan volumes totalled €5.2bn in Q1 2017 compared to €3bn in the previous quarter and €2.6bn in Q1 2016, according to Marlborough Partners' Quarterly Snapshot report, which notes that the uptick was mainly a result of borrowers taking advantage of more favourable terms due to improved market conditions. Overall, European issuance came to a whopping €34bn in the quarter, compared with only €14bn over the same period last year.

The average institutional spread of loans continued to come down, not only due to an improved economic outlook but also due to an imbalance between supply and demand, according to the report. 

"The amount of available liquidity in the market is such that some deals are now repricing within a very short time frame – some within a three- to six-month period," says Marlborough partner Markus Ehrler.

TLB spreads averaged at 377 basis points (bps), which, put in the broader context, was still above the 2007 level of 250bps. As of the end of Q1 2017, the iTraxx was trading at around 290bps.

"Yields have definitely come down a bit and leverage up but we're not at 2007 levels; and remember, interest rates are still at 0%," says a London-based debt fund manager.

There was also a further relaxation of financial covenants with more than 70% of deals in the European market issued on a cov-lite basis, compared to 50% in the same quarter last year, according to the debt adviser. Again, in comparison to pre-crisis times, covenant-lite only appeared in roughly 7% of all financings in 2007. In 2016, €34bn's worth of cov-lite loans were issued compared to €8bn in 2007. Looser covenant packages on offer include more flexibility for incremental debt, wider permitted acquisition criteria and a greater tolerance of refinancing risk.

According to unquote" sister publication Debtwire, more evidence of large-cap as well as US-style terms creeping into the mid-market space is apparent in the increased trend of portability clauses in debt deals – giving a new sponsor the option of using the existing ­­­­­financing package.­­ "Portability is being asked for, but more in the later life cycle of a deal," says the fund manager.

The bond market was also up in Q1 2017 with volumes at €24bn, which is around 2.3x higher than the figure seen in the first quarter in 2016.

Pricing creep
Marlborough also noted in its Q1 report that with so much money still to deploy both on the equity and debt sides, there has been an increase in purchase price multiples. The average entry multiple after fees and expenses stood at around 9.7x in 2007 compared with 10.8x in the first quarter of 2017, after a flat period between 2009 and 2013, according to the adviser.

Though leverage is creeping up, with the average total leverage multiple standing at 5.2x in Q1, it is still significantly under the 2007 high-water mark of 6.1x. Furthermore, the composition of debt packages has changed, with subordinated paper taking a more prominent role in 2007: second lien and mezzanine debt added an additional 1.5x leverage per deal in 2007 compared with only 0.3x in 2017. The average senior leverage multiple on the other hand came in at 4.9x compared with 4.6x in 2007, which in the debt adviser's opinion demonstrates increased risk appetite from senior lenders, and the unwillingness of sponsors to increase leverage with subordinated debt due to the higher costs.

Equity cheques went up to roughly 50% of the purchase price in Q1 2017. In the US, the level is closer to 40%, showing that there is more competition for European assets, as well as the fact that fewer are coming up for sale, Marlborough also noted.

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• Topics
• Financing
• Marlborough Partners
• Senior debt
• Mezzanine
• Refinancing