Bonds lead European leveraged finance issuance, but loan deals wait in wings

The softer tone in risk assets during the first trading sessions of the new year is unlikely to thwart what is expected to be a busy January for European leveraged primary markets, as issuers seek to capitalise on attractive conditions across both high yield and loans.

“I don’t think the [soft] opening week changes anything in terms of primary markets,” said one high-yield head at a European bank. “It was a very, very strong rally into year-end, and the levels we are at now in terms of spreads and rates are still very attractive for issuers.”

High yield bonds led the new year reopening on the back of a stellar start for investment-grade supply, but loans are expected to pick up very soon, with supply for the first month or so likely to be fairly evenly split between the two markets. “Timetables have slipped and this may push the initial peak of the market into February,” said a banker. In an early year estimate sent to buyside clients but seen by LCD, JP Morgan says the visible leveraged pipeline for the first quarter stands at roughly €19.8 billion, divided more or less equally between bonds and loans. Of this supply, roughly €5.9 billion in bonds and €5.8 billion in loans is expected from refinancing deals.

In bonds, crossover-rated German bearing-systems giant Schaeffler opened Europe's new year market to issue its first operating-level deal since winning an investment-grade rating at Moody’s in March 2023. The result confirmed that strong demand from last year has held into 2024, as the deal amassed a final orderbook sized at more than €6 billion for a €1.1 billion two-part unsecured deal to support the firm’s acquisition of peer Vitesco. While there was a slight skew to the longer-dated tranche, the BB+/Baa3/BB+ rated deal displayed ample demand across both the long-two-year and long-five-year portions, which priced at 4.625% and 4.875%, respectively — thereby demonstrating minimal difference in yield against the backdrop of an inverted Bund curve.

In the loan market, a US borrower kicked off proceedings as MKS Instruments (Nasdaq: MKSI) set a global lender call for a $744 million-equivalent add-on to cross-border loans due August 2029 to repay a bank loan. The BB/Ba1/BB+ rated borrower’s E+300 euro term loan totals €593 million, and the add-on is guided at 99. As for wider activity in loans, extensions are expected to dominate issuance in the months ahead as sponsors focus on 2026 requirements and the final 2025 needs. Bond supply, meanwhile, will be focused on refinancing 2025 maturities such as the recent €430 million, five-year deal for KKR's Q-Park, for which the borrower achieved pricing of 5.125% — the tight end of revised talk of 5.25% area, and tighter than previous guidance at 5.5% area.

One step beyond
Lower yields and spreads are also prompting issuers to refinance debt beyond their most pressing maturities. For example, Italian label and luxury packaging group Fedrigoni last week priced a €665 million six-year floating-rate bond at E+400 offered at par, replacing a €725 million floater paying E+600 which it placed in 2022 to support its buyout at the hands of BC Partners alongside existing sponsor Bain.

Of the floating-rate bond refinancings issued since the spike in interest rates in 2022, LimaCorporate’s €295 million E+575 FRNs due 2028 were redeemed at 101 on Jan. 3  following Enovis’ (NYSE: ENOV) acquisition of the orthopaedic implants group. However, there are other costly 2022 vintage deals — such as the E+600 BestSecret and E+750 Tendam Brands floating-rate notes — which also look ripe for a takeout.

Constrained supply
Beyond the flow of refinancing transactions, the number of underwritten deals in Europe ready to take advantage of early year demand is limited, bankers admit. In loans, LCD’s calendar of deals mandated but not launched to a bank meeting started the year at €4.2 billion — which roughly tallies with JP Morgan’s projection of new-money supply for the first quarter of €4.2 billion in bonds and €3.8 billion in loans.

 

The largest deal preparing to launch is an expected cross-border financing in bonds and loans backing Zegona Communications’ €5 billion acquisition of Vodafone Spain, and also in the Spanish telecom space a term loan is expected to come from Masmovil’s combination with Orange. Elsewhere, a cross-border loan is tipped to follow Leonard Green’s acquisition of TenCate Grass from Crestview. Beyond these situations, Europe is set to lose out to a powerful US market, as an all-dollar deal is expected to back Partners Group’s $2.5 billion buyout of energy infrastructure inspection group Rosen.

These deals are unlikely to be enough to address the market’s supply/demand imbalance, bankers add. “The market is clearly wide open and there is huge demand for credit,” said one banker. This dynamic should keep the market open for opportunistic activity, and indeed Fedrigoni's deal has already provided an indication of the scale of the opportunity on offer.

Repricing drive
In Europe, however, bankers are not expecting anything near the whopping 22 loan repricings that launched in the US market last week amid elevated loan prices. The Morningstar LSTA US Leveraged Loan Index began the year with some 42% of deals trading above par. In Europe, the December share of constituents in the Morningstar European Leveraged Loan Index (ELLI) quoted above par was much lower, at 6.95% — but is still at its highest since January 2022, and up from 2.84% in November. Even so, the first European repricings are imminent, bankers note. “The opportunity is not as great as it is in the US, but it is there and repricings are coming,” said one banker.

These exercises are expected to take the margin on a decent B/B2 rated name into an E+400-450 context, which puts the gap between such a loan deal and a similar transaction in private credit at roughly 150 bps. This could be enough of a differential to tempt some private credit names back to distributed markets, bankers hope, and a handful of deals are expected to follow across both high yield and loans this quarter.

That said, this supply is likely to be more of a trickle than a flood, given many obvious candidates will still be covered by 101 or 102 call protection, bankers point out. “A lot of great credits went to private debt during the disruption seen from 2022, and we are certainly pitching for them to come back to do a distributed deal,” said one banker, who admitted that a lot depended on the attitude of existing lenders, which may be loath to give up good names.

On a fully flexed basis and taking account of underwriting fees and other costs, however, pricing points in distributed and private debt markets are closer than suggested by the gap outlined above. Bankers do though say the success and volume of deals at the end of last year — including from names such as Synlab, with its bond and loan take-private — have dispelled any lingering doubts over the availability of financing in syndicated markets.

Private equity sources add there is increasing evidence of renewed vigour to underwrite from even those banks that had stepped back from leveraged markets after taking losses in the aftermath of the outbreak of war in Ukraine. “Many banks want to appear relevant after a year during which direct lenders have taken much of their market share,” said one sponsor source.

 

A banker agreed with that analysis, while admitting this does not signal a sudden shift towards public markets. “Direct lenders are here to stay and this isn’t going to be a year where banks suddenly take back all their share,” he said. “But the offering is more balanced.”

Even so, what both direct and syndicated lenders need is a return of M&A activity. Analysts estimate there are now roughly 90 mandated sellside processes with prospective private equity buyers involved, while noting that roughly 50 sellside processes have been put on hold since the invasion of Ukraine, but could be restarted quickly.

The hope here is more certainty on rates could help close the valuation gap between buyers and sellers that has stymied activity over the past two years. “At the very least no one thinks rates are going to go up, and the worst for inflation is over,” said a banker. Others agree, adding that private equity ultimately has to return money back to investors. “Dividends and fund-level financings are a stop gap but ultimately PE needs to recycle,” a manager added.

Featured image by Alexander Spatari/Getty Images

This article originally appeared on PitchBook News