In this paper, our Leveraged Finance team share their observations on the European leveraged loan market and discuss the prospects for the asset class in 2019.
- European loans found relative favour with investors as 2018 marked a return to volatility for global markets. European loan returns were modestly positive, thanks to pricing stability and high running coupon income, unlike other risk assets
- Loan issuance was close to €100 billion in gross terms, leading to an expansion of the market, driven by an increase in LBO and acquisition financing with refinancing only accounting for a fifth of overall supply after a bumper 2017
- The widening in loans spreads, while less dramatic than for comparable public bonds, means they are near double their pre-crisis lows
- Ongoing diversification by geography of the institutional investor base should help to underpin demand for European loans in 2019
- Uncertainty could crimp overall M&A but could just as easily create opportunities for private equity, that has the dry powder even to take private some more listed companies, caught in the market crossfire
- While leverage levels may remain static, further attempts to dilute documentary protections need resisting – easier in volatile markets – and will make credit selection ever more vital for lenders
- Markets face 2019 with a number of global headwinds, though credit conditions remain benign and default levels low, meaning market volatility and the withdrawal of central bank support may conspire to reduce liquidity at times
- Loan markets have been the subject of a string of negative press and regulatory headlines over recent months, but fundamentals continue to support the asset class; that said, loan prices will likely be more sensitive to corporate announcements and earnings reports from here.
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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.