Overview
The European loan market has had an astonishingly strong start to 2024. Throughout January, the European Leveraged Loan Index returned just shy of 1.7 per cent (excluding currency) - the highest monthly return for a year. This week’s Chart Room shows how in February the value of the index reached its highest level since its inception in 2002.
Given the expectation that central banks will soon cut rates, the continuing strong performance of this floating rate product seems counterintuitive. We think the answer most likely lies with a strong technical bid for loans, rather than market fundamentals. Put plainly, the broadly syndicated loan (BSL) market is tightening because demand for the product is far outstripping supply, not least because of the appetite from the flourishing collateralised loan obligation (CLO) market.
CLOs are the largest buyers of European syndicated loans. So far in 2024 there have been nine new CLOs totalling over €5bn[1], with up to 30 more managers stocking up on assets before they get to the pricing stage.
On the other side of the equation, there have been very few new BSL deals coming into the primary market this year to satisfy the demand. Year to date there have been volumes of €16.4bn reported[2], but only around €2.3bn of this is new money supply to finance M&A or leveraged buyouts - supply that can soak up the excess liquidity.
The majority of BSL deals this year have been opportunistic transactions by borrowers looking to take advantage of investors’ demand to lock in attractive pricing, and many companies have refinanced, repriced, or extended existing loans over the last few months.
But we’ve also seen signs of companies replacing their fixed rate securities with floating-rate loans in preparation for the expected fall in rates. France’s Parts Holding Europe, for example, refinanced a fixed rate 6.5 per cent secured high-yield bond due in 2025 with a new €960m floating rate loan in the BSL market.
Deals like this have brought some new supply to the primary market, as have transactions by companies previously financed by direct loans which are replacing these deals with attractively priced BSLs. Given how strong demand for new BSLs is, we estimate that some borrowers may be saving around two percentage points by refinancing direct loans arranged a couple of years ago in the broadly syndicated market.
Already this year payment services firm Planet has replaced its previous funding structure – which included a €457m term loan alongside a €254m unitranche facility – with a single €910m term loan. Merchant services tech firm Ingenico has refinanced a private direct loan with a broadly placed €1.1bn deal.
While deals like this are welcome, they’re unlikely to satiate investors who are ravenous for new debt. Indeed, the market is unlikely to see a normalisation of the supply-demand imbalance until the M&A cycle restarts in earnest and new leveraged buyouts return in force, which may not be until the second half of 2024. In the meantime, we should expect to see the technical bid continue to drive performance in the European leveraged loan market and more new issuers looking to take advantage.
[1] To February 27. Source, Pitchbook LCD, February 2024.
[2] To February 29. Source, Pitchbook LCD, February 2024.
