Europe’s leveraged loan market remains on track for long-term growth in spite of a severe slowdown in issuance in the past 12 months, according to a report issued by Standard & Poor’s. In the six months to March 31, 2002, issuance plunged to 27.4 billion ($25.1 billion) from Euro43.3 billion over the same period the previous year. Although bank lending predominates, institutional investors–and collateralized debt obligation managers in particular–are developing an increasing appetite for such assets. ‘Nevertheless, given the complexity of these transactions, there is a need to clarify how the creditworthiness of leveraged loans is determined, to provide a better understanding of the rating process, and to identify the criteria used,’ said Blaise Ganguin, a director of Standard & Poor’s Corporate Ratings Europe. As the report points out, analyzing the credit quality of a leveraged loan is treated similarly to that of a highly leveraged company. Liquidity forms the prime focus because the financial profile can deteriorate significantly in a short period of time. As a result, particular attention is paid to underlying cash flow assumptions (including revenue growth), costs, capital spending, and debt service payments.
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