28 Feb 2019

AFME European High Yield and Leveraged Loan Report: Q4 2018 and Full Year

The Report contains European leveraged finance market trends for the fourth quarter of 2018, which includes issuance and credit performance figures for the high yield and leveraged loan markets.  

Key highlights:

  • European leveraged finance issuance (leveraged loans and high yield bonds) decreased to €28.9 billion in 4Q’18, a 43.7% decrease from €51.3 billion in 3Q’18 and a 72.4% decrease from a record €104.6 billion in 4Q’17.

    For the full year 2018, European leveraged finance issuance reached €215.5 billion, a decrease of 34.0% from €329 billion in 2017.
  • Primary high yield issuance totaled €6.9 billion on 22 deals in 4Q’18, a 60.9% decrease from 3Q’18 (€17.7 billion on 46 deals) and a 82.1% decrease from 4Q’17 (€38.6 billion on 90 deals). All of the high yield issuance in 4Q’18 was in developed market Europe with no issuance in emerging Europe. For the full year 2018, high yield issuance totaled €74.9 billion, a decrease of 41% from €127.9 billion in 2017.

    The proportion of USD-denominated issuance decreased to 8.8% in 4Q’18, down from 20.6% in 3Q’18 and 16.8% in 4Q’17. For the full year 2018, USD-denominated deals accounted for 27.2% of total issuance, down from 30.3% of the total in 2017.

    The leading use of proceeds in 4Q’18 were general corporate purposes with €2.8 billion, followed by acquisitions with €1.5 billion and leveraged buyouts with €1.3 billion. For the full year, general corporate purposes was also the main use of proceeds with €34.3 billion, followed by refinancing and/or repayment of debt (€ 17.6 billion) and acquisitions (€9.5 billion).
  • Leveraged loan issuance, including first lien, second lien, and mezzanine financing, decreased to €22.0 billion in 4Q’18, a 34.7% decrease from €33.6 billion in 3Q’18 and a 66.7% decrease from €65.9 billion in 4Q’17. For the full year 2018, €140.6 billion in leveraged loans were issued, down 30.1% from €201.1 billion in 2017.

    Refinancing and/or repayment of debt were the largest use of proceeds in 4Q’18 with €14.8 billion, followed by leveraged buyouts (€6.1 billion) and general corporate purposes (€0.5 billion). For the full year, leveraged buyouts was the main use of proceeds (€52.2 billion), followed by refinancing and/or repayment of debt (€50.4 billion) and acquisitions (€30.6 billion).

    In 4Q’18, pricing spreads for institutional loans widened by 4 basis points (bps) q-o-q but tightened by 21 bps y-o-y while spreads for pro rata loans widened by 21 bps q-o-q and by 11 bps y-o-y.
  • Credit quality: As of November 2018 (December 2018 data not available at time of publication), S&P reported the trailing 12-month speculative-grade default rate at 1.9%, a decrease from 2.1% end-September 2018 and a decrease from 2.4% end-December 2017. Moody’s reported the trailing 12-month speculative-grade default rate in December 2018 to be 2.3%, up from 2.0% end-September 2018 but down from 3.4% end-December 2017.

    Five bond-related defaults were reported in 4Q’18, four in developed market Europe and one in emerging market Europe. For the full year 2018, 20 European high yield issuers defaulted, 15 in developed market Europe and the remaining five in emerging market Europe.

    According to S&P, in 4Q’18 downgrades exceeded upgrades in developed market Europe (39 downgrades to 27 upgrades), a much worse ratio than 17 downgrades to 19 upgrades in 3Q’18 and than 26 downgrades to 47 upgrades in 4Q’17. For the full year 2018, the number of upgrades decreased to 99 from 137 in 2017 while the number of downgrades increased to 102 from 91 in 2017.