Uncertainty, in its many guises, looks set to prevail in 2019. Nevertheless, high running coupons – and trading opportunities – bode well for a year of higher returns from the European loan market.
In this paper, our Leveraged Finance team share their observations on the European leveraged loan market and discuss the prospects for the asset class in 2019.
- European loans found relative favour with investors as 2018 marked a return to volatility for global markets. European loan returns were modestly positive, thanks to pricing stability and high running coupon income, unlike other risk assets
- Loan issuance was close to €100 billion in gross terms, leading to an expansion of the market, driven by an increase in LBO and acquisition financing with refinancing only accounting for a fifth of overall supply after a bumper 2017
- The widening in loans spreads, while less dramatic than for comparable public bonds, means they are near double their pre-crisis lows
- Ongoing diversification by geography of the institutional investor base should help to underpin demand for European loans in 2019
- Uncertainty could crimp overall M&A but could just as easily create opportunities for private equity, that has the dry powder even to take private some more listed companies, caught in the market crossfire
- While leverage levels may remain static, further attempts to dilute documentary protections need resisting – easier in volatile markets – and will make credit selection ever more vital for lenders
- Markets face 2019 with a number of global headwinds, though credit conditions remain benign and default levels low, meaning market volatility and the withdrawal of central bank support may conspire to reduce liquidity at times
- Loan markets have been the subject of a string of negative press and regulatory headlines over recent months, but fundamentals continue to support the asset class; that said, loan prices will likely be more sensitive to corporate announcements and earnings reports from here.