The European loan market has experienced something of a revival over the past 18 months. 2013 saw by far the largest volume of issuance for several years, while 2014 is on track to record an even higher total. Volume reached €50bn in the first half of 2014, a 16% increase on the same period last year.
Secured loans make up a significant and growing portion of the broader European loan market. Known as ‘secured’ because they typically have first priority over the assets of a company in the event of a default, secured loans are an important source of debt financing for non-investment grade businesses, alongside the high yield market. Despite the increased level of supply in recent months, demand for secured loans has remained strong. Investors have been attracted to secured loans in part due to expectations that short term interest rates will rise over time, given that loan yields are linked to these rates.
Issuance volumes in Europe have been driven by a mixture of refinancings from existing issuers, merger and acquisition (M&A) activity and private equity/management buyouts. The second half 2014 has started strongly, with a healthy pipeline of deals still due to come to the market over the next few months. While secured loan issuance is still some way off the levels seen previously, as shown in the chart below, it seems confidence in the loan market has returned from both issuers and investors.
Western European new institutional leveraged loan issue volumes
Source: Henderson Global Investors, Credit Suisse, S&P LCD, as at 30 June 2014.
In 2014 there has been a revival of large M&A deals in Europe, many of them funded by loans. Numericable, a French cable business, acquired SFR, a French telecommunication company, in the spring of this year. The financing included €5.6bn of loans alongside high yield bonds as part of a record €15.8bn debt package. Boots, a UK pharmacy, which is soon to be merged into the US firm Walgreens, previously held the record for the largest loan-funded leveraged buyout.
Other well known companies to tap the loan market this year include Formula One, the motor sport operator, and Saga, a UK based insurance and leisure company.
The increase in issuance has allowed the secured loans team to selectively add new loans to their portfolios this year, focusing on larger businesses with predictable cash flows and a proven track record throughout economic cycles.
