By Chris Kandel
The European leveraged loan market is going from strength to strength, with a continuing surplus of available credit compared to deal requirements, resulting in very borrower-favourable terms. However, we are seeing signs of a two-tier market emerging, with strong demand and pricing reductions for deals perceived as stronger credits, alongside an increase in flex for some other credits. We are also seeing an increase in volatility. In our view, PE deal teams need to be aware of the recent market developments, which are impacting financing terms.
Developments in the Financing Market
The growth of the European institutional market is influencing credit availability for deals. 2017 European CLO issuances are at a new record, and alternative lenders continue to raise significant amounts. On the demand side, while refinancing volume has picked up, this does not offset the relative slowdown in the number of European leveraged acquisitions. Because the imbalance is most pronounced in Europe, Europeanleveraged loan pricing is cheaper than in the US, reaching a differential of 120 bps in October — the widest at any time in 2017 according to S&P Leveraged Commentary & Data (S&P).