22 Feb 2017

European High Yield and Leveraged Loan Report: Q4 2016

 Issuance highlights:

  • European leveraged finance issuance (leveraged loans and high yield bonds) increased in 4Q’16 to €54.6 billion, a 2.5% increase from €53.3 billion in 3Q’16 and more than double the €25.6 billion issued in 4Q’15. The quarterly increase was led by leveraged loan issuance, which increased by 33.8% QoQ while high yield bond issuance decreased by 36.5% QoQ.
  • for 2016FY, European leveraged finance issuance reached €202.7 billion, an increase of 18.5% from €171.1 billion in 2015. Leveraged loan issuance increased by 60.4% y-o-y to €121.3 billion (the highest annual volume since 2007) while high yield bond issuance decreased by 14.7% y-o-y to €81.3 billion in 2016.

Issuance: Leveraged Loans

  • in 4Q’16, €12.9 billion of amend-and-extend (“A&E”) loans were financed, a large increase from €2.7 billion in 3Q’16 and €0.9 billion in 4Q’15. Despite the surge in 4Q’16, A&E loans issuance fell by 20.7% to €18.5 billion in 2016 from €23.3 billion in 2015.
  • refinancing and/or repayment of debt were the largest use of proceeds in 4Q’16 with €29.4 billion followed by leveraged buyouts with €6.0 billion and acquisitions with €2.9 billion. For 2016FY, the top use of proceeds mirrored 4Q’16: refinancing and/or repaying of debt ($65.6 billion), leveraged buyouts ($25.9 billion), and acquisitions ($24.4 billion).
  • there were no mezzanine loans and four 2nd lien loans financed in 4Q’16. For 2016FY, only one mezzanine loan was issued (€0.1 billion) with €1.3 billion in 2nd lien loans and the remainder €120.0 billion in 1st lien loans.
  • European CLO outstandings, including SME deals, increased by 13.0% to €194.6 billion in 4Q’16 from €172.2 billion. Non-SME CLOs increased by 19.8% to €105.0 billion in 4Q’16 while SME CLOs increased by 6.0% to €89.6 billion. Year-over-year, SME CLOs increased by 31.2% while SME CLOs decreased by 5.3%.

Issuance: High Yield Bonds

  • high yield issuance for refinancing and/or repayment of debt in developed market Europe decreased to €4.9 billion (48.3% of all issuance in 4Q’16), down from €11.2 billion in 3Q’16 (53.3% of total) but up from €1.4 billion in 4Q’15 (11.4% of total). In emerging market Europe, €0.7 billion was issued for refinancing and/or repayment of debt in 4Q’16 down from €0.8 billion in 3Q’16 but up from no deals issued for that purpose in 4Q’15.
  • for 2016FY, high yield issuance for refinancing and/or repayment of debt was €31.7 billion in developed market Europe (46% of the total issued) and €1.4 billion in emerging market Europe (11% of the total), up 89.0% and 854.7%, respectively, from 2015.
  • the proportion of USD-denominated issuance decreased to 29.0% of all issuance in 4Q’16 compared to 40.2% in 3Q’16 and 36.8% in 4Q’15. For 2016FY, USD-denominated deals totaled €33.8 billion (41.6% of total issuance), almost unchanged from €33.9 billion, or 35.5% of total, in 2015.

Credit Quality

  • according to Fitch, leveraged loan default rates (by value) stood at 0.9% in December 2016, up from 0.5% in December 2015. Including C and CC rated issuers as if those had already defaulted, the rate was estimated at 1.9% in 2016. 
  • as of December 2016, S&P reported the trailing 12-month speculative-grade high yield default rate at 1.7% (2.3% at end-December 2015) while Moody’s reported the default rate to be 2.1% (3.6% end-December 2015).
  • in 2016, 24 European high yield issuers defaulted— 16 in developed market Europe and eight in emerging market Europe. 

in 4Q’16 downgrades exceeded upgrades both in developed market Europe (33 downgrades to 26 upgrades) and in emerging market Europe (7 downgrades to 6 upgrades). The number of upgrades decreased slightly to 115 in 2016 from 119 in 2015 while the number of downgrades dropped sharply to 170 in 2016 from 211 in 2015 resulting in a much smaller downgrade to upgrade ratio in 2016.