• Leveraged loan volumes amounted to €76.7bn, a 74% increase year-on-year but down from €146.142bn in 2021, as A&E and add-ons took centre stage. Issuance was lumpy throughout the year, with 25% of overall volumes coming in just five weeks.
• Single B pricing averaged E+467bps and 97.4 OID (versus E+459bps and 95.9 in 2022), while Double Bs averaged E+427bps and 98.1 (versus E+405bps and 96).
• A&Es dominated volumes, representing 55% of the total, for an average 120bps margin uplift, as issuers churned through their maturity walls. LBOs supply dropped considerably, accounting for only 8.6% of the overall issuance, on the back of continued valuation dislocation. Add-ons made up 15.4% of volumes. 
• Consumer discretionary names led the way in volumes (23.9%), as well as average price rises in secondary, with non-cyclical healthcare still strong at 15.2% 

High interest rates, A&Es, weak volumes. These three elements describe 2023 in European leveraged finance, even if the last few weeks have seen deal flow step up.

According to 9fin data, €76.7bn of leveraged loans were issued in the last 12 months versus €43.9bn in 2022. That’s a 74% increase year-on-year, but remains a gloomy picture against the heights of 2021 and 2019, when issuance reached €146.142bn and €82.77bn respectively.

“We haven’t had a lot of deals, that's self evident,” said one CLO manager. “Everybody needs more issuance.”

According to 9fin data, TLB margins trended lower through the year, following an improving macro environment, and positioning for a pause in the raising rates cycle. Overall, however, primary Single B margins widened slightly on 2022, averaging E+467bps versus E+459bps the year prior. OIDs came in tighter, at an average of 97.4 OID versus 95.9 in 2022.

Double Bs, meanwhile, followed the same pattern, averaging E+427bps and 98.1 (versus E+405bps and 96).

Surya Ysebaert, global head of liquid loans at Partners Group, agreed that volumes have been down “quite remarkably” but acknowledged that “plenty has happened under the radar.”

“We experienced a lot of add-ons where we were in, so we have been able to fill the requirements by participating in these numerous deals, optimizing our portfolio and structure,” he said.

15.4% of volumes this year came from add-ons, says 9fin data, up from 13.8% in 2022 — both years are significantly higher than the 2017-2021 average of around 4.2%.

“Numbers aren't the same as we've seen in previous years, but they're better than forecasted at the beginning of the year. Also CLOs continued to print, and that’s 70% of the market,” one sellside banker commented.

Overall 2023 has been an window market, as 25% of the total issuance was pushed out in just five weeks of the year — in late December, late September, early November, as well as early July.

“There have been moments in the year, as in July, where the market gave us a decent range of deals to contemplate,” the CLO manager said. “But overall, it's been a pretty mediocre year.”

With lower volumes and few new borrowers in the market, most of the CLOs managers 9fin has been speaking to have complained about the average allocations and the liquidity available on the secondary market. 

“We’ve had perennial complaints about allocations from buysiders not getting enough percentage on loans, but with all the A&Es people have been able to lock higher coupons on they side,” a second sellsider said. 

“We’ve been able to participate quite a lot every month. with at least three, four or five add-ons. But sometimes we didn’t get the percentage we were expecting,” an investor said. 

“Overall the loan market has been supported by CLO managers that need to print because they're almost forced printers and buyers,” the second sellsider said. 

A&Es take centre stage

9fin data showed that 55% of the overall volume has been related to A&Es in 2023, with an average extension of three years. The majority, as in the case of Innio and EG Group, were 2025 maturities pushed to 2028.

“I do expect more real new deals to come to market because sponsors are really looking at the same deals [from the same issuers],” Ysebaert said.

The biggest 2023 disappointment has been in LBO supply, the most lucrative deals for arrangers. These have accounted for only 8.6% (€6.59bn) of the total amount, with the long-awaited Cinven take-private of Synlab helping the numbers in December. (See our coverage here.)

“2023 was so bad [for M&A activity] that 2024 can’t be lower,” said a third sellsider. “I’m hoping we’ll see that market wake up.”

Market participants 9fin spoke to blamed the gap in asset valuations between sellers and buyers as “liquidity in debt financing is there, whether it's through the syndicated market, direct lending, or high yield,” according to the first sellsider.

“The bid/ask spreads in valuations has been quite wide,” said Josy Mazzucchiello, partner at Partners Group.

“In Q3, we started to see a little bit of a pickup. Synlab is one example, and we’ve noticed more private equity going into the public markets to pick up more undervalued assets, but looking at 2024, a lot will depend on the macro environment and on CLO creation for larger deals.”

The first CLO manager said: “From an M&A standpoint, we’ve had 30% to 40% less deals versus a year that was not great already [2022]. There hasn't certainly been enough issuance to keep the secondary market in check, which in return has been fairly difficult to trade the CLO portfolio or make the arbitrage work in the context of not enough paper to buy.”

On average, borrowers received a 120bps margin uplift pushing maturities up to three years. The troubled telecommunications operator Altice France and the Norwegian cruise ship operator Hurtigruten have offered investors 250bps more compared to their previous loans. 

See our coverage of the Altice France saga here. 

Stronger companies, such as fire protection systems manufacturer Minimax, software firm BMC Software and non-food retailer Action, haven’t really moved away from existing margins, boosting the new maturities by 50bps or less.

Data also shows that garden furniture manufacturer Keter was the only issuer to include a PIK element to each post-A&E tranche — but this reflects Keter’s status as a troubled borrower trying to deal with 2023 maturities, in the wake of failed A&E attempts in the past. See 9fin’s restructuring summary here.

“Sponsors have been trying to be actively pushing their maturity wall away as not to run into any refinancing risk,” Mazzucchiello said. 

With sale processes stalled, recaps were another theme of 2023 — accounting for 4.2% of volumes. Two sellsiders expect that trend to continue into the next year, with the third sellsider already mandated for some in the 2024 pipeline.

“Doing a dividend recap or exiting is case by case, if sponsors are fundraising they need to show some exits,” Mazzucchiello said. “For good companies the market is open for dividend recaps. Exiting is maybe more challenging, and therefore sponsors may be looking to potentially extend the wall trying to take some time in order to find better exit routes, particularly because the IPO markets don't seem to be there at the moment.”

Another active theme in loans has been the constraints on CLOs, with 30% of outstanding deals now out of their reinvestment period (RP) due to a lack of reset activity, a record high level expected to rise further, Barclays’ research team wrote in the note: “Tenable technicals, fading fundamentals.”

“A lot of CLOs are out of the reinvestment period and that may be a problem, because effectively they cannot extend, so you need to find new money to raise to pay down loans if the company is in a more distressed situation,” said Mazzucchiello. 

In less stressed companies, existing lenders being unable to extend has opened up opportunities for new investors, a second buysider said, in a year with otherwise paltry supply. In some A&E deals, sponsors have reserved allocations for new lenders, they added.

Mazzucchiello said certain A&Es “are a little bit harder to achieve unless sponsors are happy to put equity capital in and give up a little bit more.”

Cherry picking

For buysiders this year, the best opportunities have been found by cherry picking credit profiles, with renewed focus on interest coverage and company cash profiles amid rising rates.

“This approach has been crucial — we valued more countercyclical businesses with sustained cash flows that could reduce the correlation with interest rates through low duration and floating rate issues,” a third buysider said. 

2023 saw slightly more supply from BB-rated names, with these loans making up around 24% of issuance in 2023 versus 18% in 2022.

“In Europe, most BB names are listed, default risks on this segment are low in the short term, and it is a market in which several upgrades are occurring,” the third investor said. 

At the beginning of the year, rating agencies expected default rates to pick up at around 7%. Two sellsiders speaking with 9fin expect defaults to pick up in 2024 as companies struggle with increased interest burdens and hedges roll off.

Multiple investors warn against taking a sector-by-sector approach, but some industries have shown more resiliency than others. Chemicals, real estate, and building materials have come under pressure as inflation and interest rates hit the balance sheet — see 9fin’s coverage on chemicals here and building materials here. 

“Earnings have been relatively resilient — apart from chems (which came off peak earnings/demand slipping) and building materials (another cyclical sector facing pressures),” said the first CLO manager.

Gauthier Reymondier, head of European liquid and structured credit at Bain Capital Credit said: “Segments that suffered the most last year, like the food industry, have basically rebounded, with gross margins recovering despite the volumes not being great.”

He added: “Chemicals and building materials, or anything construction-related, have greatly suffered this year. Some market analysts were expecting a volume rebound in Q3. We are not yet seeing it. I think we have stopped declining, but it's now “lower for longer” for affected sectors. It is probably still too early heavily go back to cyclicals based on spread levels.” 

Looking at issuance by segment, healthcare has remained one of the top sectors for supply, at 15.17% in 2023, but this is behind its usual volumes, pulled back by lower M&A activity. 

“That was a sector that used to be a great provider of new debt because of the continuous M&A activity, and now that's definitely done,” the first CLO manager said.

"The lab businesses suffered the most, as Covid disappeared faster than anticipated. With yield going up, they have to repair the balance sheet by consolidating the acquisitions and doing some cost savings,” they added.

French labs business Biogroup, downgraded from B to B- by S&P in December, reported a 16% YoY decline in revenues in the third quarter, underscoring the firm’s challenges in recovering from its pandemic highs, with EBITDA falling 31% YoY to €97m. See our latest earnings digest here.

Synlab, one of the year’s few large cap LBOs funded in the broadly syndicated market, is facing pressure on FCF after three bumper years, due in part to falling demand for PCR testing and other Covid-related products. See our latest coverage here. 

The CLO manager said 2024 is not going to be a great year for the healthcare but “none of the major players has very short term debt, they have two to three years in front of them to improve their structure.”

Consumer discretionary names led the way in volumes (23.86%), with EG Group, Nord Anglia Education and Action Retail being among the biggest names to come to the loan market. 

Education groups Galileo Global Education and Nord Anglia brought the European loan markets’ first repricings in nearly two years, while the veterinary pharmaceuticals firm Ceva Santé Animale debuted in the dollar market with a €2.3bn-equivalent dual-tranche TLB. 

Investors we spoke to for our stories pointed out that most of the consumer discretionary names that came to market had solid track records of business performances and interest cover. 

The segment is also a winner in terms of loan price performance, reporting a 9.1% increase from -6.6% in 2022. Consumer staples follow with +5.5% vs -10.8% of last year. 

“We invested in consumer companies only looking at names which are well known given their exposure on consumer spending and inflation,” the first buyer said. 

Not every deal sailed through smoothly, though. Restaurant Brands Iberia, for example, pulled its €310m 2023 dividend recap deal in October, citing “challenging market conditions” – the first deal to be pulled since March.

Direct lending bites the LBO space

The role of direct lending has remained a major topic, and a source of competition for the syndicated markets in 2023. Direct lenders haven’t taken over from the traditional lender groups in larger outstanding deals, but it has been rapidly eating market share in LBO financing. 

“Direct learning market and syndicating market go in pairs. Direct lending markets are a little bit more looking through the cycle and not as volatile as the syndicating markets,” Partners Group’s Mazzucchiello commented. 

Synlab offers one example, with the junior capital, in the form of a PIK note, preplaced to four private credit funds ahead of the broader syndication of the TLB and bonds. See our story here.

“Smaller and medium cap companies are generally going to the direct lending market because it's easier to find few parties that have capital that are happy to lend. And usually there is also a risk premium that the syndicated market would give which affects this,” Mazzucchiello added. 

“There is capital to be deployed in both markets and a lot will depend on the opportunity, the underlying credit and the sponsor deciding one versus the other.”

One CLO manager suggested that lots of the deals going to private credit would have struggled in the broader syndicated space, and been forced into market with unpalatable B3 and CCC ratings.

9fin’s Jonathan Klonowski writes in his private credit outlook that private credit has increasingly become the primary route for financing sponsor-led deals in Europe.

Private credit is increasing emerging as a solution for large, multi-billion deals, two CLO managers said, where the syndicated market has lacked the depth this year to take them on. 

Adevinta’s proposed take-private led by Blackstone and Permira, the largest private credit deal ever seen in Europe, illustrates the direction LBO financing is taking. 

According to 9fin data, LBO financing in Europe accounted for more than a third (36%) of private credit deals in the first nine months of the year. In contrast, only 3% of leveraged finance deals from Q1 to Q3 2023 were used for LBO financing.

See full report here.

An advisory firm said that we’ve been living “in the golden age” of private credit and “there is still room to grow”. 

“The reality is that private markets are quicker and easier to access for companies, and they have more certainty of execution. In some segments, banks are no longer competitive. Direct lenders have so much dry powder.” 

The third banker said: “The three markets — syndicated loans, high yield and direct lending — will settle into working together, no one market is replacing the other. The direct lending market can handle complicated credit stories, but has been focusing on non-cyclical sectors in the past two years […] and you can still do very large deals in BSL and HY. It’s a good time for issuers, because they get the choice now.”

2024 — Hurry down the chimney

“Surprise”, a fourth investor told us when asked to describe this year in one word. “The market started to feel that there's going to be a hard recession and towards the end of the year they’d realise it wasn't right. A lot of pessimism didn't materialize. And the market has been more resilient than people expected,” they said. 

9fin’s Ryan Daniel and Laura Thompson have already published their 2024 levfin outlook, see here for more – but the market consensus for next year is certainly better than it was at the end of 2022. 

Inflation data are finally trending down in the major economies, and central banks seem to agree that hiking interest rates is no longer needed. 

“We’re seeing the end of tunnel, but the world has changed, and we’ll probably stay in a higher interest rate environment for longer. However, loans and high yield markets are 100% open,” the first sellsider noted. 

Other bankers called for caution, as bullish markets often ignore underlying risks. 

“Markets are leaning to heavily on a soft landing scenario, where inflation has disappeared and the economy shows growth. Nobody is really pricing geopolitical risks anymore, everyone is running. That's the greatest danger,” a fourth banker said.