European LevFin Wrap — Pipeline fills up as primary goes on a break to recharge

Alessandro Albano

23 August 2024•5 min read

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We’re deep into the summer break, and the primary market in Europe looks like London during the Covid shutdown — empty.

But it doesn’t mean all operations have been shut, as bankers speaking with 9fin said origination desks are working on deals to launch as soon as everyone is back to office. This pent-up deal flow should mean it is business as usual in September in what has already been a productive year.

This wrap has been written from the east coast of Italy, where the author is not reminiscent at all of one of the popular spots in London during summer. Image of Hampstead Heath Pond, photo by Matt Brown.

According to 9fin sources, the September calendar has around €16bn between bonds and loans, but October might be the month where we’ll see markets in full swing again, a senior banker said.

But It’s unclear whether the last four months of 2024 will replicate the strong performance the leveraged loan market has had in the first half of the year, with €103bn of term loan Bs issued up to June — a 15% increase over the same period in 2021, as per 9fin data.

Link: Table. Charts by Fatima Kane | fatima@9fin.com

A hot topic in the galleries is whether we'll see more new money deals following a pickup in LBO financing in Q2, or if refinancings and repricings will keep their strongholds — they accounted for almost 70% of H1 volume.

We’ve heard Evri (formerly Hermes), one of the UK's largest parcel delivery companies, is readying a roughly €1.5bn-equivalent syndicated package for post-summer to back the take over from Apollo.

The deal will be split roughly down the middle with euro loans and sterling bonds and is one of those deals that should land in September, as reported.

Lenders are hungrily awaiting the mega LBOs like the ones of DB Schneker, Deutsche Bahn’s logistics unit which is now up for sale, Sanofi’s curve out of its consumer health division and the announced proposal for Brookfield to takeover the Spanish pharma company Grifols.

9fin reported that the potential take-private has caused the group’s debt stack to rally towards their prices for either a change of control put offer, or redemption — look at the chart below.

An overview of Grifols’ debt instruments and their recent moves. Credit: 9fin

We also reported Italy’s Forno d’Asolo and Acqua & Sapone are expected to convert their bridge loans to high yield notes by the end of Q3 to back their respective sales.

9fin is putting together a pipeline round-up before issuance kicks off again in September — stay tuned.

It’s up to sponsors

Technicals are supportive of more new money deals in the market, handing the responsibility over to sponsors for closing leveraged buyouts and giving credit investors new opportunities.

“Central banks started cutting interest rates, and banks feel very comfortable in underwriting and lending to companies,” a senior banker told 9fin at the time of our H1 loan report. “If we don't see some deals, it's a sponsor problem.”

According to Alcentra’s European loan outlook, loans posted a 4.8% return year to date, compared with 3.7% and 3.2% for US loans (EUR hedged) and European high yield, respectively, with “attractive opportunities” expected throughout 2024.

Returns have been supported by strong market technicals across demand and supply, with solid fundamentals across the market and earnings growth across most sectors, according to the report.

“While we have seen a pickup in loan issuance in H1 2024, this has been comfortably absorbed by a healthy pipeline of collateralised loan obligation (CLO) issuance and inflows into loan funds on the demand side,” said Daire Wheeler, head of European liquid credit at Alcentra.

But high issuance volume doesn't necessarily the same on the supply side, which has been weaker than expected due “the subdued level of M&A volume globally”.

Looking ahead, Alcentra does not expect M&A volumes to pick up materially until later this year, and therefore would expect the related supply of loans to the market to remain relatively contained.

CLOs technicals played an important role in this environment, with a “healthy flow“ of CLOs printing through 2024 that will help the European loan market for the remainder of the year.

Kartesia’s research shows that July was another strong month for CLOs, with spreads marginally tighter across the capital structure.

“Euro CLO AAA spreads closed the month 2.5bps tighter in secondary, and 7bps in primary at DM+97.5/DM+130, respectively,” wrote Michael Htun, head of CLOs, and Panagiotis Dounavis, structured credit associate, in the report. “Euro CLO tranches in general have had a strong 2024 with YTD total returns on BBB/BB tranches of 7.1%/9.8%.”