Leverage finance markets are still in rude health, according to a new study.
Debt advisor Marlborough Partners estimates that Europe saw its leveraged loan volumes jump to €23.5 billion in Q2 2013, a 47 percent increase on the €16 billion raised in the first quarter. In the UK alone, loans volumes rose from €2.7 billion in Q1 to €4.7 billion this quarter, a 74 percent increase. Year-to-date loans, which totalled €7.4 billion in the six months to 30 June 2013, were also up by a similar proportion.
Sustained appetite for leveraged debt instruments was mainly driven by a boost in refinancings, the report said. They represented 63 percent of leveraged loan volumes in the first half of 2013 and 53 percent of high-yield bonds issuance in the second quarter of the year. M&A activity represented a diminishing share of the total, while dividend recaps remained a minor source of demand.
The trend remained robust despite a drop in risk appetite in June, after the US Federal Reserve hinted at a potential ‘tapering’ of its bond buying program. Despite falling 14 percent on the previous three months, Q2 2013, at €18.3 billion, was still the second highest quarter on record for high-yield bond issuance.
The iTraxx Europe Cross-Over index, which tracks pricing expectations for sub-investment grade bonds, rose to over 500 basis points in June, suggesting retreating demand for high-yield bonds in reaction to the Fed’s announcement. But the index fell back to around 430bps at the end of the period, as the market quickly settled and the US’ central bank adopted a more accommodating stance.
At a time when industry participants describe the high-yield and leveraged loan markets as increasingly correlated – a reflection of Europe’s gradual move to a more capital market-based strategy for raising debt – the study also showed that this thesis was only partly true. While pricing in both markets moved in the same direction in June, the resilience of leveraged loans compared to high-yield issuance suggested that volumes remained only loosely correlated.