Merger and acquisition (M&A) activity is driving the improving primary, secondary and leveraged loan market picture in Europe – as was outlined by the LMA at its end of year review on 2 December at the Clifford Chance Auditorium in London’s Canary Wharf financial hub.
However the falling oil price, Russian sanctions and on-going eurozone instability – illustrated by stalling growth in Europe’s biggest economy, Germany – could yet threaten the long-term picture. Regardless, those European corporate and other institutional investors that do have money will be looking to loan it out for a good return and driving the market forward as acquisitions pick up.
According to the LMA event chair Nick Jansa, head of European leveraged debt capital markets at Deutsche Bank, the investment grade (IG) market will next year almost return to its pre-2009 levels, standing at €906bn in Europe, the Middle East and Africa (EMEA) in 2015. The primary IG loan market was worth €747bn in 2013 and stood at €797bn through the middle of November this year.
“The outlook is generally positive,” confirmed Jansa, who was joined on stage at the LMA event by a panel, operating under the Chatham House anonymity rules, comprising of Fiona Hagdrup, a leveraged finance fund manager at M&G; Raouf Jundi, a syndication managing director at Bank of Tokyo-Mitsubishi; Damien Lamoril, head of EMEA loan syndicate markets at Société Générale CIB; and Matt Leventhal, a European loan trader in currencies and commodities at Barclays Capital.
The consensus of the panel was that there is a shift back towards the core loan markets in Europe as M&A gathers pace into 2015. “All the core EU countries are running above their normal average lending,” said Jansa, pointing to figures illustrating the UK on 25%; Germany on 18% and France on 13% – which is above their average share over the last five to 10 years. Peripheral European volumes in outlying countries in 2014 fell behind their longer term averages.
Increased M&A activity and more initial public offerings (IPO) will be the main drivers of a generally improving liquidity picture, although there will continue to be a scarcity of commercial paper from corporate treasurers as many firms that wanted to release corporate bonds to ‘lock-in’ good rates have already done so. Nevertheless, the refinancing trend will continue as some firms and institutions come to market.
Any EMEA treasurers at large firms who do release IG commercial paper will no doubt get a good response from the LMA’s members, which mainly consist of institutional investors, rating agencies, law firms and commercial and investment banks. Some commercial paper activity is definitely still expected in 2015 according to attendees at the LMA’s seminar.
Further afield, African issuers were expected to continue to tap the large pools of Middle Eastern liquidity available in the EMEA loan market and “the German short loan market is expected to get going too,” commented one member of the LMA panel, “with Turkey picking up some displacement business due to Russian sanctions.”
The falling oil price, which has now dropped by 40% this year – and is also detrimental to Russia – could impact the amount of new Middle Eastern liquidity available to be tapped, but Arabian countries’ sovereign wealth funds are well enough established to continue investing the panel concluded.
Conversely, European sovereign debt levels are still an issue in the eurozone and “the overall [non-loan] recovery there still looks very fragile”, said a panellist.
money market fund (MMF) regulations
in the US and Europe might yet impact how and where pooled funds are placed, but this issue was mainly left for the future as EMEA MMF regulation is still behind the US in this regard. Much work still needs to be done on the move from constant net asset value (CNAV) instruments to variable (VNAV). Europe is undecided too on the use of liquidity fees and redemption gates, among a raft of other legislative changes impacting the investment and loan arena.
In the loan markets specifically “there is an incredible appetite from banks to buy assets”, said one LMA panel member operating under Chatham House rules. This perhaps opens up further opportunities for large corporate bond issuers in EMEA. However, the impending Basel III capital adequacy stipulations will no doubt change the operation of the bank and loan markets in future years as new collateral requirements and market norms come into place. Small to mid-cap companies in EMEA are likely to look to the capital markets (as their US peers do), crowdfunders or other alternative sources of finance as banks restructure their lending operations in the longer-term.
The volume of leveraged loans is expected to pick up in EMEA in 2015. An LMA panel member shared a prediction of €80bn for the end-of-year total market figure – up from €67bn in 2013. The upward trend is expected to continue in the leveraged finance segment, partly resulting from large cash-rich firms looking for growth via acquisitions – although whether the figure will break into triple figures was up for debate.
“In regard to the pricing on offer to corporates and other investors in Europe this will be attractive -as it should be in a macroeconomic environment that is hardly rosy in comparison to the US,” was one comment.
Other 2015 predictions included a trend for European corporates to look further afield for investment opportunities, especially for those companies that have repaired their balance sheets and are sitting on big cash reserves. “Typically they’ll look outside of the eurozone, where growth prospects are still better,” remarked another panel member.
The Oil Price Factor
In the emerging markets (EM) space, including Russia, the falling oil price will be a key complicating factor in shrinking loan coverage – alongside the sanctions regime imposed against that country. Both will inevitably impact the volume and amount of Russia-related liquidity available.
“Some EM money that would have gone to Russia will be displaced to Turkey or Africa,” said an LMA panellist. “The reduction in the oil price could also support more growth in the eurozone of course, acting as a spur for economic activity there, but the possibility of deflation and excess liquidity cannot be discounted either.”
It is still an extremely fragile economic outlook in Europe at the moment. Some LMA panel members naturally acknowledged that the overall environment was not good, but maintained that the primary, secondary and leveraged loan markets were healthier than they have been for some time and on the mend. The high corporate profits of recent years, coupled with the current acquisitive bent of companies, no doubt contribute towards this positive European loan market outlook, with the core EU countries growing somewhat against other EMEA players that have previously dominated in recent years. EM markets will shrink a little in comparison.
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