The report reveals that credit markets appear to be healing, with default rates slowing down. However, sovereign debt concerns and fears of contagion appear to have reignited in Europe in end-March.
Highlights
• European leveraged finance issuance, which includes leveraged loans and high yield bonds, totalled €26.5 billion in the first quarter of 2010, up from €24.6 billion in the prior quarter. As in the prior quarter, issuance, although up, was primarily focused on refinancing, amend to extend, and termouts to mitigate “maturity wall” problems in the near-term.
Market and Economic Environment
• Financing conditions generally remained unchanged in
Europe, with banks reporting a net tightening of standards to both small and large issuers similar to the tightening seen in Q4’09. While there appears to be a slight net decrease in tightening standards to large issuers, liquidity constraints appear to be easing slightly comparatively, as competition from banks were cited as being the largest factor on a net basis affecting credit standards.
• However, it appears that loan demand has continued to drop in Europe, with banks reporting a net decrease in loan demand from both large and small issuers. M&A, fixed investment, and debt issuance continue to remain primary factors contributing to decreased demand, although it appears on a net basis that these factors are slightly less important than in Q4’09.
• Sovereign debt issues, particularly Greece, continue to contribute to the volatility of the credit markets in Europe, particularly toward the end of Q1’10. Shortly after the end of Q1’10, the International Monetary Fund, the European Commission, and the European Central
Bank reached an agreement for a €110 billion financing plan for Greece, followed by a larger EU-wide €750 billion package to “address the severe tensions in certain market segments.”
Issuance: Leveraged Loans
• Leveraged loan issuance, which includes first lien, second lien, and mezzanine financing, totalled approximately €15.9 billion in 1Q’10, up 142.4 percent from €6.5 billion in 1Q’09. As in 2009, 2nd lien and mezzanine financing remained relatively flat.
• According to Dealogic, leading sectors in leveraged loan issuance in 1Q’10 were from telecommunications (€3.7 billion), publishing (€3.43 billion), and computers & electronics (€2.29 billion). Virgin Media’s £1.25 billion deal is the largest leveraged deal in 1Q’10 in Europe not primarily focused on refinancing (Seat PagineGialle €1.5 billion primarily to refinance existing facilities, while Kabel Deutscheland GmbH’s €1.4 billion deal primarily an amend-to-extend transaction).
• Fewer refinancing deals were of the amend-to-extend variety, with 18.6% of all leveraged loan deals containing some form of maturity extension, but “maturity wall” pressures continue to ease with traditional refinancing deals; fully 67.1% of all leveraged loans were issued to refinance or repay existing debt.
• CLO issuance continues to remain muted. According to AFME/ESF, only one issue backed by leveraged loans of €580.7 million was issued in Europe in 1Q’10. With bank balance sheets constrained and a reduced investor base, the market for loans continues to remain weak. According to S&P LCD, the forward pipeline for loans in Europe at end-March was €0.
Credit Quality
• The credit markets appear to be healing, with default rates slowing down: according to S&P, the high yield 12- month trailing European default rate was 6.59% as of end-March, down from 7.5% end-December 2009, albeit slightly higher than the 5.1% default rate end-March of 2009. Only 1 default was reported in Q1 in Europe, an Irish media and entertainment company.
• However, sovereign debt concerns and fears of contagion appear to have reignited in Europe in end-March. While three sovereigns were downgraded in Europe (S&P - Iceland, Republic of Montenegro; Fitch - Iceland, Portugal), additional sovereign downgrades have appeared on the horizon in early Q2’10.
• European total upgrades/downgrades edged downward slightly in 1Q’10, with 46 rating actions reported in both developed and emerging market Europe, down from 57 in
4Q’09 (and 128 in Q1’09). The pace of downgrades Europe, with only two downgrades reported in Q1 (SAZKA a.s., Evraz Group), down from 20 in Q4’09.
Downgrades were concentrated primarily in the Eurozone, led by banks (four), transportation (four), and utilities (four).
© AFME
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