European high-yield bond issuance has surged in recent years as sponsors have tapped into the liquid, cheap, and covenant-lite financing offered by bonds, to refinance loans and to support mergers and acquisitions (M&A).
However, there are early signs that the popularity of financing M&A via high-yield bonds is waning, while loans are regaining ground.
In 2013, 59% of M&A financings (mainly leveraged buyouts) tracked by S&P Capital IQ LCD across the European loan and bonds markets were financed by term loans and a revolving credit facility (RCF) – the lowest share in four years – while 14% were financed by high-yield bonds and an RCF, the highest share in four years. In contrast, in 2014 year-to-date 77% of all M&A deals have been financed by loans only and bond-plus-RCF financing has not yet been used.
Supporting this trend is the growing acceptance of covenant-lite loans in Europe, as investors become accustomed to seeing deals structured in this way. Covenant-lite loans (i.e. loans with no maintenance covenants) have begun appearing in Europe via cross-border transactions syndicated in Europe and the U.S. In 2014 year-to-date*, approximately €2bn of covenant-lite loans have been sold in Europe. This compares to 8bn in 2013 (full year), €1.4bn in 2012, and €7.7bn in 2007.
According to S&P Capital IQ LCD, since the financial crisis, no covenant-lite loans have been sold purely into the European market, but investors’ hunger for assets is encouraging them to take a more tolerant stance towards this type of loan. On this basis, leveraged companies with strong credit profiles could tap the domestic market without maintenance covenants during the course of the year.
“Sponsors have traditionally preferred loans over bonds, because they can be repaid more easily,” commented Ruth McGavin, Associate at S&P Capital IQ LCD. “This natural preference is re-emerging, and will be aided by investors’ willingness to buy covenant-lite loans in Europe.”