Only tumbleweeds came through the pipeline compared to a blockbuster 2021, when a record-breaking €134bn of euro-denominated leveraged loans were issued, with Materials and Healthcare the largest sectors (see 9fin’s 2021 loans wrap here). The silver lining is that even though 2022 volumes plunged against 2021, the fall is less pronounced compared with the prepandemic run-rate.

Add-ons dominate

One term which has represented the European leveraged loan market this year would be “fungible add-on”.

Because regular syndication was getting trickier and trickier, small taps became one of the main ways recurring issuers could fill their funding needs and pay for bolt-on acquisitions this year.

A spate of add-ons also coloured the closing weeks of 2022 with the likes of KronosNet, Barentz or Emeria. However, only better performing credits had the opportunity of successfully pricing an add-on relatively close to par. For the buyside, this trickle of supply was an opportunity to switch out of more troubled exposures.

“Let’s say we’ve got a credit with concerns, trading in the high 80s, when a new issue comes to the market with palatable spread and better OID, it gives an opportunity to switch to that deal without losing much par,” said a second buysider.

Back to the banks

More important and more challenging than printing add-ons was finding a home for the slew of hung deals this year. The challenges in placing TLBs with institutional accounts has led to the bank bid becoming much more prominent, as execution has had to become more creative.

The most obvious example is the return of the term loan A — TLAs accounted for around 20% of Q3 leveraged loan issuance, versus a four-year average of 3%, as banks struggled to offload LBOs deal underwritten in more pleasant times.

But this also extends to giving banks a bigger bite of the TLB supply that has come to market.

“We’ve given much more specific deliberate attention to the bank bid this year, bringing them in at the pre-marketing stage — usually that was to sell the excess revolver, but now we’re selling down the TLB as well,” said one sellside source. “We’ve been pursuing that audience much more deliberately, earlier, and in a systematic way.”

Before this summer, most deals that leant on the bank bid for TLBs would be sub-€500m loans in countries such as Germany and Spain where the company had strong relationships with local banks. Bankers named deals such as Flender and TK Elevators.

The emphasis on the bank bid drove longer syndication processes. Banks that needed around six weeks and, as a second sellside source put it, “hand-holding” through the process for a “€25m ticket” could not get their timelines to work with the two week deal processes generally used in better times.

“You have to be generous with commitment deadlines now,” the second sellside source said.

Bookrunners had to get more creative and approach a more diverse lender pool and as a result the syndication process was slower and constantly changing.

The second sellside source said: “You can’t make the same kind of assumption in syndication that you could before. You used to show a deal to around 12 guys and you could extrapolate a lot of information from the small sample size and, anything that didn’t come up, you could accommodate that in pricing movements.”

Even though 9fin does not gather data on direct lending (yet), private credit and direct lending have also been invited to the table much more this year.

“Now, we have to speak to alternative lenders because we need a lot more visibility for end demand — we can’t assume that money will just show up. Feedback has to be constantly refreshed,” said the sellside source.

Ratings are a crucial ingredient for accessing the bank bid. Banks are only looking to get involved with TLBs from better-rated companies (B or B+) three sellside sources agreed. This level of bank involvement, and the resurgent TLA market will remain in the toolbox — but is unlikely to hit 2022 heights again.

“[TLAs] will be the exception in 2023. I see it as a solution only for shorter term loans with some sort of catalyst like M&A, but it won’t be like this year with involuntary TLA,” said the first sellside source. “Small TLAs with local and international banks that want a look at the IPO coming in 12 months could happen,” they added.

Lock me up

The increased TLA activity, especially the “involuntary” TLAs added to deals with an underwriting overhang, brought extended MFN protections referencing the syndicated price, rather than the margin as in a usual MFN.

These MFN lockups were often agreed between the underwriting banks and TLB lenders, to avoid lenders being offered more attractive pricing later on — and therefore undermining the incentive to participate in a deal. These provisions were included in, for example, deals for Inetum or Citrix. Read the 9fin Educational from our legal team on the syndication MFN feature in 2022 here.

As December saw a rally in loan prices, this opened the door to banks chipping away at their involuntary TLA holdings. KronosNet’s €95m E+575 bps 2029 TLB add-on deal was issued to partly repay a €400m TLA that helped take the original levfin package over the line in late September.

If the market continues to stabilise, additional supply to replace TLAs might come through. In euros, Inetum (€533m) and Flutter Entertainment (€750m) stand out as the most significant TLA pieces issued in 2022.

Keep the margin down

In a market downturn it is not surprising that no single issuer decided to reprice their tight credit spreads from previous years. Repricings completely disappeared from 2022’s supply figures.

Some companies have dealt with their 2023/2024 maturities already, but most are still waiting on the sidelines, with €13.7bn of euro-denominated leveraged loans maturing in 2023, according to 9fin data. This includes contentious names such as Keter, SLV Lighting and Flint peppering the list.

Amend & extend processes are likely to become a more widely used option to gain some breathing space (see our Distressed Outlook for more), but they can be challenging, as demonstrated by the difficulties faced by Keter.

Deep discount sale is over

Tightening central bank policy rates, inflation pressures and the shock from the Russian invasion of Ukraine all pushed new deal pricing into much wider territory this year. Average single-B TLBs priced at 389.6bps over Euribor in January but ended the year at the 433.3bps level. In comparison, the average single-B margin for new TLBs rose only from E+375bps to E+394 in 2021. Due to credit deterioration, B1-rated supply became more scarce in 2022 and B2 credits dominated volumes.

Margin, however, is a poor guide to the market deterioration, because in 2022 most loans have been issued with substantial OIDs. The lowest price primary issue came from Rodenstock, which printed at 88 with an E+500bps margin in July for its €150m add-on.

With 93 the new par, the rush of fungible add-ons, a trend expected to continue into the new year, poses a problem for some CLO shops, said first sellside source.

As CLO liabilities have moved, a market dominated by add-ons locked at 2021 pricing (roughly E+375 bps) leaves the two sides of the market out of step.

“We’re getting some shops telling us: what we need now is high margin paper,” said the first sellside source. “There’s a ton of names they can go out and buy at 375 bps in the low to mid 90s in secondary, but they need to carry through to equity too.”

Buysiders also expect companies to struggle with fungible deals. “There’s only so far you can drop OID. CLOs need new paper, we don’t have demand for 375 bps paper,” said the fourth buysider. “Everyone’s lost a lot of par, obviously, it’s just not going to come all the way back. Deals with 2027/28/29 maturities will sit in the low 90s for a while.”

Therefore, margins have to probably move up more in 2023 as recently issued CLOs want issuers to pay up for liquidity with non-fungible deals rather than offer deep OID discounts. See our CLO Outlook for more.

Consumer anxiety shows

Loans from all industry sectors 9fin tracks traded down this year. Inflation pressures and recession fears meant consumer-driven assets fared the worst, and these sectors generally also avoided primary issuance unless absolutely necessary.

“There were definitely assets you wouldn’t touch in 2022 because of macro conditions,” said the first buysider.

Because of limited demand and poor liquidity, 2022’s primary supply was mostly dominated by resilient sectors. Breaking them down, Materials more accounted for 21% of 2022 euro loan issuance, per 9fin data, second only to Healthcare at 23%. Other hard hitters were Communication Services and IT with 13% and 12%, respectively while Industrials followed with 10%.

Consumer Discretionary was next at 8%, down from a 15.5% share in 2021. The smallest sectors were Utilities (0.2%), Energy (1.2%) and Real Estate (2.6%).

Several buysiders through the year mentioned being overly exposed to health care and chemicals, and 2022 gave them few opportunities to branch out. Some sectors which didn’t come to market this year could benefit from a technical tailwind next year, as a result of the undersupply — if they come at the right price.

Loans, as floating rate instruments, proved better positioned than bonds this year. Leveraged loans with almost €40bn of supply were up 52% on HY, a market which saw €26bn of euro-denominated paper. This carries on from 2021, where loan issuance was 11% above HY after lagging 22% behind in 2020.

9fin recently has published its leveraged loans outlook. You can request a copy of Slow but steady wins the primary - European Leveraged Loans 2023 Outlook.