RPT-Fitch: European leveraged loan chart book
Sept 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has published its quarterly European leveraged loan chart book, which illustrates recent trends in European leveraged loan issuance, maturities, default rates as well as discussions around the issuers and sectors that are more at risk of a default. The latest edition focuses on new issue trends and portfolio characteristics by country, impact of size on leverage and enterprise value multiple. The analysis is based on Fitch's portfolio of credit opinions (CO) of about 330 European leveraged credits, representing EUR285bn of senior and junior loan debt.
During the period between May and August 2013, Fitch observed an emerging split in terms between mid-size and larger borrowers, with further increases in debt multiples and loosening in the documentation of leveraged loans with bond like clauses allowing for additional leverage conditioned by incurrence tests. For large, broadly syndicated deals, the agency has observed more capital structures mixing subordinated high yield bond and senior leverage loans that introduce an untested mix of US and European market and legal standards.
This re-leveraging trend, mostly for large borrowers, highlights the multiple pockets of loan market liquidity available to primary and secondary deal activity. Specifically, legacy European CLO 1.0 managers have some remaining reinvestment capacity, new European CLO 2.0s are demanding greater collateral choice, and asset managers have developed leveraged loan managed accounts for institutional investors. In addition, many European banks have rebuilt capital and are in search of new assets while US CLO 2.0 and leveraged loan funds have excess liquidity in search of assets.
Despite clear growth in new issuance, and the aggressiveness of terms on offer, the supply of new vintage leveraged loans has yet to meet the demand from these multiple sources of liquidity. High enterprise valuations ('EV') set by public equity market and strategic acquisition comparables may be shifting financial sponsors' appetite towards selling businesses rather than purchasing them given current market conditions. While over the summer longstanding leveraged credit Springer was recycled and the corporate spinoff of Ceramtec was subject to an LBO, the recent sales of SBO and LBO candidates of Grohe and Ribena Lucozade were sold at premiums to Japanese strategic investors.
The credit quality of the portfolio has stabilised compared with May 2013 and the proportion of B-* and below is at the lowest since the onset of the crisis through a more benign economic environment and extension of maturity. Between May and August 2013, about 20% of the portfolio went through a maturity extension of some kind, either through refinancing or amendment and extension of the existing loan maturities (amend and extend). Most of the defaults since the start of the crisis have been due to high leverage, with few defaults due to immediate liquidity issues.
COs are private point-in-time assessments of credit risk principally based on confidential information supplied by CLO investors on individual borrowers. COs are regularly updated but are not monitored as public ratings, and there is no relationship with the borrower's management or owners. They are identified by an '*' after the rating.
Link to Fitch Ratings' Report: European Leveraged Loan Chart Book - September 2013
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