A volatile situation: Europe versus the United States | White & Case srl

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Key points to remember

Leveraged finance activity slowed on both sides of the Atlantic in the first half of the year as a tougher macro environment and events in Ukraine affected debt issuance in Europe and the US .

The deeper and more liquid US market weathered market headwinds better than the smaller European market, where exposure to the Ukrainian situation was more immediate due to the disruption in the energy supply chain and geographical proximity, but the two markets encountered headwinds.

According to Debtwire Par, US leveraged loan issuance reached $612.5 billion in the first half of 2022, down 19% year-on-year. Despite this, issuance remained stable, exceeding US$100 billion for four months between January and June, peaking at US$113.9 billion in April.

High-yield bond activity in the United States, meanwhile, stagnated in April and May as investors sought safer alternatives in a higher interest rate environment. As a result, emissions were down 76% by the end of the second quarter of 2022, year-on-year, although recent activity suggests this trend may have bottomed out. In June, high-yield bond issues totaled US$8.6 billion, more than double the May total.

Emissions in Europe proved to be equally volatile. High-yield bond issuance reached $31.1 billion in the first half of 2022, down 71% year-over-year. Markets nearly closed completely in March and April, with just US$2.2 billion and US$2 billion in issuance, respectively, before recovering to US$4.5 billion in May. Many issuers have been forced to offer options on floating rate bonds to keep markets moving – at the end of May nearly a fifth of European bonds had floating rate coupons, up from 12% in 2021 and 8% in 2020.

European leveraged loan markets also slowed, with issuance of $67.8 billion in the first six months of the year, down 65% year-on-year. The decline was particularly evident month-over-month, falling from a high of US$16.4 billion in March, before the macroeconomic and geopolitical landscape deteriorated, and then steadily falling to US$4 billion. in June. Unlike in the United States, emissions also followed a decline for all major uses of proceeds in Europe, from general corporate to mergers and acquisitions activity, including buyouts.

A relatively bright spot was new issuance of Collateralized Loan Obligations (CLOs) in Europe, which was down just 9%, year-over-year, at the midpoint. In the US, by comparison, CLOs were down 12% year-on-year, although activity there also remained flat.

View Full Image: US vs. Europe: Leveraged Loan Issuance by Value (2018 – 2022) (PDF)

High Yield Bond Issuance by Value (2018 - 2022) in the US vs. Europe

View Full Image: US vs. Europe: High Yield Bond Issuance by Value (2018 – 2022) (PDF)

Inflation and interest rates

Leveraged loan issuance in Western and Southern Europe fell 65% in the first half of 2022, year-on-year, compared to a 19% drop in the United States

Despite some differences in issuance patterns, US and European leveraged financial markets nevertheless face the same inflationary and interest rate pressures. US inflation hit a 40-year high in June, hitting 9.1%, while it soared to 9.4% and 8.6% in the UK and EU, respectively , the same month.

In the United States, the Federal Reserve took decisive action to try to contain inflation, with interest rate hikes in March, May, June and July. In the UK, the Bank of England (BoE) has raised rates six times since December 2021, reaching 1.75%, the highest level in more than a decade. Both organizations are expected to announce further rate hikes this year. In July, the European Central Bank (ECB) raised rates for the first time in more than a decade, by 0.5%, with further hikes expected later in the year.

Price pressures

The medium to long-term outlook is for a higher rate environment to take hold in all jurisdictions, driving up the cost of capital for European and US issuers.

In Europe, institutional loan pricing increased steadily, with average first lien spreads on institutional loans increasing to 4.48% in the second quarter of 2022, from 4.2% in the first quarter of 2022. A high volume of loans at low rating has lifted prices, with rated issuers preferring to delay funding rather than brave a choppy market.

European bond markets have also seen their spreads increase, with weighted average yields to maturity on fixed-rate bonds standing at 6.8% in the second quarter of 2022, compared to less than 5% at the end of 2021.

Prices also increased in the United States, with overall prices in high-yield markets rising from 5.71% in the first quarter of 2022 to 8.07% in the second quarter. U.S. loan pricing also rose over the same period, from 3.96% to 4.31% in the second quarter.

In the United States and Europe, issuers also faced wider initial issuance discounts (OIDs) due to the par discounts available to investors in the secondary loan markets. In the United States, for example, average OIDs in the second quarter of 2022 climbed to 2.74%, compared to 0.94% in the first quarter.

Europe leads in ESG

One area where the European market has been more robust is in ESG-related loans and bonds. While Europe’s leveraged financial markets faced a volatile market environment, the region maintained its position as the largest market for ESG-related debt, where margins on loans are tied to compliance with key ESG performance indicators.

According to Nordic bank Nordea, Europe accounts for half of the ESG debt market, more than any other jurisdiction. Bloomberg’s analysis confirms this perception: only one of the ten largest ESG debt borrowers is based in the United States, with the other nine all operating in Europe.

A strong ESG investor base has enabled European ESG-related debt issuers to continue to secure their funding. For example, Italian power company Enel, a pioneer in ESG-linked debt, issued £750m of sustainability-linked bonds in April. The offering, which is linked to reducing greenhouse gas emissions, is the largest set of ESG-linked bonds ever issued in sterling.

The US is scrambling to close the gap under the Biden administration, but with the product more familiar to European lenders and the EU’s Sustainable Financial Disclosure Regulation – which defines asset qualification criteria environmental and social – is gaining ground, the United States has some catching up to do. do.

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