The Day After by Edvard Munch, 1894–95

The macro environment offered little to no support, with the Fed’s minutes confirming interest rates will stay higher for longer and offering no sign of an imminent policy easing — bets for US rate cuts in March fell to 69% according to CME, the lowest since the December meeting.

In Europe, the latest annual CPI print in Eurozone and Germany blew up market hopes for an ECB pivot as early as March.

The euro area posted a 2.9% increase in December after six months of consecutive falls, following a higher than expected German print – 3.8%, the fastest rate in three months. 

Government bond markets suffered from this backdrop, with the 10 year Treasury and 10 year Bund up over 4% and 2.1% respectively. 

“Latest data belie the assumption that the ECB will cut rates in the short term. Policymakers will be careful not to abandon their cautious stance too soon in the absence of clear signs that economic growth is weakening or inflation is approaching the 2%” target,” Richard Flax, chief investment officer at Moneyfarm, wrote in a note sent via email to 9fin.

Investors and sellsiders we’ve spoken to expect deals to flow in January, but of a character similar to that seen in December, with high yield bonds and refinancings more likely to hit the screens rather than the much-coveted new money LBO supply.

According to 9fin sources, there are at least four loan deals and five high yield deals set to come this month.

One bank is bringing around €4bn of loan supply in the month, according to a presentation seen by 9fin, with just over half of volumes going to refinancings. Around €2bn of new money TLB supply, plus €1bn of refis, will follow in the next two months.

The bank's high yield output is set to be slightly more productive, the presentation shows, with around €3bn of refinancings and €500m of new money in January. The bank has around €2bn of new money and €3bn of refi supply readied for the following months.

The near-team pipeline includes a dual HY/TLB healthcare deal of around €700m and two underwritten TMT deals — one a sterling loan of around £500m and the second a dollar/euro €2bn-equivalent deal across loans and bonds, the presentation said.

See here our primary pipeline story.

Leveraged loans

Funding for Zagona’s takeover of Vodafone Spain is one the most hotly anticipated deals in the TMT space, with more than €4bn of funding required.

However, syndicated markets might grab only €2bn of the overall debt, according to 9fin sources, with private lenders potentially stepping in for the remainder.

“There should be some new supply from the deal, but not all of it“ an investor said. 

One of the few large LBOs last year, Cinven’s take-private of Synlab AG, also featured a syndication/private credit combo, with 15 banks and four private credit funds financing its buyout — though the private credit funds took the junior capital, rather than splitting the senior debt.

The clinical laboratory and medical diagnostic services provider went to market in late November, offering €1bn of 2031 TLB at E+475bps and €450m of 2031 SSNs at 7.875%.

Private lenders got their hands on Synlab’s junior debt, financing it in the form of a PIK note.

The role of direct lending remains a major topic in the levfin space, as it has been rapidly eating market share in LBO financing. See here for our 2023 Wrap.

Tencate Grass could be another name soon in the market, as the private equity firm Leonard Green & Partners has taken over the company from Crestview Partners. 

The Dutch firm is a well known name in the loan space, with three fungible add-ons issued in 2023 on top of its €315m E+500bps 2028 TLB.

The €274.3m 2028 add-on TLB had been originally marketed in September 2022, but later pulled due to high market volatility.

Amer Sports, with a €1.7bn outstanding TLB, filed documents for its previously announced US IPO on Thursday. According to the filing, IPO proceeds will be used to partially repay the RCF and to repay shareholder loans which have not been equitized as part of the transaction. There is no mention of a reduction in the existing TLB.

While leveraged buyouts are expected to ramp up in 2024, Barclays wrote in a report that it sees “relatively little scope for European leveraged loan supply to pick up meaningfully”, forecasting a gross supply of €40bn or a 25% increase versus 2023. 

Relative to the size of the market, this number would still be historically low, Barclays added.

CLOs’ reinvestment period are also an ongoing concern for the loan market, with 30% of them out of it and “a substantial volume” of 2026 maturities ahead. 

“The amount of A&E activity in addition to CLOs out of RP is an issue for WAL tests in CLOs, and so we see the risks skewed to the downside for CLO demand even if perhaps initial concerns were somewhat overblown,” Barclays said in the note. 

Weekly leveraged loans movers

High yield

EHY saw no new announcements in the first trading days of the new year, but the seven-day period from 28 December to 3 January saw inflows across €-IG and PE HY funds, according to a separate Barclays research.

In the high yield space, further steady inflows continued last week. mostly driven by ETFs, although mutual funds also recorded inflows. 

Looking at valuations, the OAS of euro-denominated investment grade was 8bp wider over the period, while the PE HY index was 11bp wider, Barclays wrote.

A faster pace of disinflation and a soft landing outlook suggest a supportive technical environment for the HY space, but idiosyncratic risks will continue to dictate performance through 2024, according to the bank.

However, Barclays has revised its PE HY spread predictions to 375-400bp from 425bp, after spreads tightened further than the bank expected over December, with the end-2023 spread level of 358bp in the 30th percentile post-GFC.

November through December saw the biggest five-week cumulative inflows in seven years, against an environment of near-zero net supply, the bank noted. 

The iTraxx Crossover has recently widened compared to Main and HY cash. 

Coupled with a large investor short-risk base, Barclays expects Crossover to outperform Main in 2024, with an end-year forecast of 315bp, 25bp tighter than currently.

The secondary market showed some sharp moves. Medical Properties’ sterling SSNs due in 2028 and 2030 tumbled after it announced plans to accelerate its efforts to recover uncollected rents and outstanding loan obligations from Steward Health Care System. 

Weekly high yield movers

Forward pipeline