Primary European Leveraged Credit Markets Improve in the Third Quarter; The Worst May Be Over, But Global Credit Market Conditions Remain Tight

Leveraged finance issuance, which includes leveraged loans and high yield bonds, was 18.6 billion in the third quarter of 2009, up from 16.5 billion in the previous quarter, but less than 24.7 billion in the same period in 2008.

High yield bond issuance of EUR 8.6 billion was recorded on 15 deals in the third quarter, compared to EUR 3.1 billion on 10 deals in the previous quarter.

There were no high yield bond deals in all four quarters of 2008.

Leveraged loan issuance was EUR 10.0 billion in the third quarter, compared to 13.4 billion in the second quarter and EUR 24.7 billion in the same year-earlier period.

Following three consecutive quarters of no issuance, the market for European emerging market bonds returned in the third quarter of 2009 with issuance of EUR 1.8 billion on 5 deals.

Decreased investor risk sensitivity and prospects for a global recovery contributed to improved market conditions in the European high yield bond and leveraged loan markets.

European high yield bond and leveraged loan returns decreased in the third quarter compared with the prior quarter. The Merrill Lynch High Yield Index and the S&P LCD European Leveraged Loan Index returned 21.3 percent and 11.3 percent, respectively, in the third quarter of 2009, compared to 28.2 percent and 16.8 percent in the second quarter and losses of 10.8 percent and 5.0 percent in the third quarter of 2008.

The European leveraged loan forward pipeline ended the third quarter with EUR 0.8 billion on bank books, 43 percent below the EUR 1.4 billion recorded at the end of the previous quarter and far less than the EUR 21.7 billion recorded a year ago. In the U.S., leveraged deals in the pipeline picked up by 61 percent in the third quarter, rising to EUR 2.0 billion at end-September from EUR 1.3 billion at end-June.

Tightened financing conditions and lower profit and economic growth trends continue to be potential downsides.

Credit quality risk, which has been rising since the second half of 2008, rose further in the third quarter from a period of historically low default rates during which corporate issuers built up their financial positions in an environment of low borrowing costs.

Reduced credit availability along with a eurozone recession adds to the likelihood of higher default rates throughout the rest of the year.

About the Report

Done in partnership with AFME / EHYA, the AFME / 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.

For more information on AFME’s efforts in the European leveraged finance sector, please visit AFME.

Credits

AFME / EHYA

• Gilbey Strub

SIFMA Research

• Managing Director, Director of Research: Kyle Brandon
• Research Analyst: Paul Rainy