AFME European High Yield and Leveraged Loan Report: Q3 2020 | AFME

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AFME European High Yield and Leveraged Loan Report: Q3 2020
25 Nov 2020
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Julio Suarez Director

The Report contains European leveraged finance market trends for the third quarter of 2020, 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) accumulated €54.2 billion in proceeds in 3Q’20, a 22.6% decrease from €70.0 billion in 2Q’20 as well as a 30.5% decrease from €78.0 billion in 3Q’19. This quarterly decline was driven mainly by a decrease in leveraged loan issuance.
  • Primary high yield bond issuance totalled €25.2 billion on 62 deals in 3Q’20, a 4.0% increase from €24.2 billion on 48 deals in 2Q’20 and a 19.5% decrease from €31.3 billion on 58 deals in 3Q’19.
  • The proportion of USD-denominated issuance decreased to 13.3% of all issuance in 3Q’20, down from 34.1% in 2Q’20 and 31.1% in 3Q’19.

    The leading use of proceeds for high yield bonds issuance in 3Q’20 was general corporate with €12.4 billion, which was up 66% from €4.2 billion in 2Q’20 and up from €46.7 billion in 3Q’19.
  • Leveraged loan issuance, including first lien, second lien, and mezzanine financing, totalled €23.5 billion on 44 deals in 3Q’20, down 48.6% from €45.7 billion on 64 deals in 2Q’20 and from €46.7 billion on 76 deals in 3Q’19.

    LBO/MBO was the largest use of proceeds in 3Q’20 with €9.8 billion, followed by refinancing/repayment of debt and acquisitions, both of which with €5.3 billion or 17.5% of the total.
  • Pricing spreads for institutional loans widened by 5.9 basis points (bps) q-o-q and by 47.1 bps y-o-y. Spreads for pro rata loans widened by 114.8 bps q-o-q and by 83.7 bps y-o-y.
  • Credit quality:  As of September 2020, S&P reported the trailing 12-month speculative-grade default rate at 4.3%, an increase from 3.2% in June 2020 and from 2.1% in September 2019. Moody’s reported the trailing 12-month speculative-grade default rate at 3.9% in September 2020, up from 2.8% in June 2020 and from 1.5% in September 2019.

  • Fitch also reported an increase in leverage loan default rates to 5.8% in September 2020 (including c* and cc* rated issuers as if those had already defaulted).

    27 bond-related defaults were reported in the third quarter of 2020 by Standard and Poor’s and Moody’s, all in developed market Europe. Missed interest payment and distressed exchange were the most frequent reason for default.

    According to Moody’s, in 3Q’20 downgrades exceeded upgrades in Europe (36 downgrades to 6 upgrades), a better ratio than 123 downgrades to 5 upgrades in 2Q’20 and 34 downgrades to 1 upgrades in 3Q’19. According to S&P, in 3Q’20 downgrades exceeded upgrades in Europe (46 downgrades to 5 upgrades), a better ratio than 147 downgrades to 2 upgrades in 2Q’20 and a worse ratio than 36 downgrades to 14 upgrades in 3Q’19.