The European loan market has taken off in 2024 after the disruptions of the previous two years, with gross issuance at a record high. Sponsors capitalised on heavy inflows into the asset class to refinance, reprice and add debt to existing holdings, and while there was a pick-up in buyout activity, sources say a significant return of M&A will be needed for the market to sustain momentum next year.
A lower than hoped for showing for M&A activity should not detract from what has been a stellar year, however. “By September we had met our budget that was then revised higher, and we’ve met that too,” said one banker. Another agreed: “We’ve seen significantly higher volumes across the board and demand has been strong all year,” he said.
LCD data bears out this sentiment. Looking at all institutional deals (including extensions but excluding repricings), year-to-date volume (to Nov. 22) of €112.6 billion is running close to 2021’s post-GFC annual record of €114.3 billion. That record is eclipsed when adding repricings to reach a gross issuance figure that includes all loan market activity, with this expanded measure showing institutional volume reaching €185.8 billion in 2024, surpassing the €158.5 billion notched up in 2017.
Furthermore the year is not over yet, and bankers say issuance could stretch into the week beginning Dec. 16. “The incredible technical and relentless pitching from us and our competitors is keeping the flow going,” said one banker. After pausing for the US presidential election, the market surged again in late November.
CLO support
This year’s flow of CLO money into the asset class has supported a return to volume levels seen before Russia's invasion of Ukraine. This followed returns (ex-currency) across 2023 that reached a post-GFC high of 13.4% as measured by the Morningstar European Leveraged Loan Index (ELLI) — more than wiping the 3.23% loss recorded in 2022. Returns at 7.6% for this year so far have surpassed expectations at the end of 2023, when analysts pencilled returns of anything between 0.2% and 6%. These predictions suggested an underperformance in loans against other asset classes, with one bank for example (and by no means an outlier) tipping a slight fall in the ELLI to 95.
In the event, the average bid in the ELLI never fell below 96 in 2024, and the index remained largely rangebound for much of the year in a 97.50-98 band. The room for capital appreciation on a product such as loans that can be repaid or repriced at will is always going to be limited, and the bulk of the year’s return has come from the interest component. “A bond can move up to 106 or more but the upside of a loan is that you get repriced,” said a banker.
New loan supply, however, has lagged demand all year. Gross CLO issuance for the year in Europe surpassed volume records at the end of October, and now exceeds €45 billion. Significant redemptions have offset this figure, bringing net CLO issuance to roughly €21 billion, according to a report published by Deutsche Bank on Nov. 19. Meanwhile, the total size of the European leveraged loan market as measured by the ELLI grew by €18.1 billion from January, reaching €297.4 billion at the end of October.
Tight technicals
This constant flow of CLO issuance has kept technicals tight all year. That said, the market has not seen any meaningful return of non-CLO money. Bankers note syndications are 70%-75%-plus taken by CLO funds, with remaining support coming from single managed accounts, credit funds or bank lenders. “SMA money has not returned, and these investors prefer to get access to loans through private credit funds,” notes one banker.
Another agreed, and highlighted the overall strength of the market. “There has been a meaningful step up in technicals and 2024 is easily the strongest year for deal flow since 2021,” he said. For borrowers and sponsors, the upshot is that market depth has returned to its pre-Ukraine level of roughly €2.5 billion available in a single syndicated euro term loan for a strong B2 rated borrower. A second banker adds that around €1.5 billion could be achieved in a single secured high-yield bond deal in euros, with a further €500 million to €750 million available in syndicated junior bonds. Looking to the US, these figures could easily be doubled in each case, he added.
Spreads have also moved lower through the year, as CLO managers handed over the benefit of tighter liabilities to borrowers. Since the summer the resistance level for sturdy B2s has held around E+375, but this level is increasingly being tested as arrangers push stronger names through to E+350. B/B2 rated Howden, for example, wrapped the repricing of its €900 million term loan B on Nov. 22 at E+350 and par, from E+400.
There is not a full market capitulation just yet though, and Socotec failed to push past par on the €105 million fungible add-on to its E+375 term loan, after it revised price talk tighter to 100-100.25. The deal eventually settled at par. “For CLOs the arb doesn’t work at E+350,” said a banker. “If you squint hard it works at E+375, but most need E+387.5 to E+400 for it to really add-up,” he said.
“The market is objectively strong but there has still been credit discipline from investors,” another banker added. This has created an ideal environment for borrowers to push out maturities — which continues a trend from last year and means the market has no significant maturity pressure until 2028. The opportunity is also expected to remain into next year as borrowers continue to take advantage of what is a near to cost-free move. “Taking out a 2028 maturity for three years at par with just a small fee for banks is not a hard decision for sponsors,” agreed a banker.
Private lessons
Sponsors have also taken advantage of this liquidity to refinance more expensive private debt facilities into loans. So far this year, LCD has counted €10.6 billion of private credit deals refinanced into loans, of which Dechra Pharmaceuticals is the latest. The deal from the UK-based veterinary drug maker is typical from sponsors that funded buyouts in private credit through 2022 and 2023, rather than risk uncertain distributed markets at the time. The savings now on offer are significant, and price talk on the euro tranche of Dechra’s loan of E+375-400 compares with a starting margin on last year’s sterling unitranche of S+625.
Bankers admit that many of the obvious names from private credit have already been addressed, though the discreet nature of that market means names can easily emerge from the shadows. Private credit is also delivering supply as buy-and-build strategies take previously mid-market portfolio companies up to a size large enough for the distributed markets. Sources note that reticence towards anything with a mid-market feel is stronger in loans than in high yield — though neither market is much interested in any ticket below €350 million.
M&A puzzle
The missing piece in this puzzle is M&A supply — or at least, more of it. Acquisition- or buyout-related volume for 2024, at €35.7 billion, is running at the highest since 2021, but is still no more than middling on a historic scale. Despite this, the year has bought some chunky deals particularly from first-time buyouts, from names such as Zegona Communications, Vodafone Spain, Evri and Applus. Volumes from mid-range sponsor-to-sponsor deals that typically drive European loan activity have meanwhile been lighter, and bankers suggest these will be key if such activity is to be maintained next year.
“If CLOs want to print the volumes that people are talking about then we as the market are going to have to deliver more paper, and that means M&A,” said a banker. Across the market bankers are more bullish on M&A, citing a pick up in auction activity and RFPs. That said, the return of M&A has been promised for at least 18 months now, and — even though volumes have increased in each quarter this year — such supply has not delivered anything close to the hoped-for quantities.
Bankers argue that falling rates should make the environment more conducive to deal-making, helping to flatter the lower than hoped for valuations that have been the primary stumbling block to M&A over the past year. Either way, the pipeline for January is so far light, and dominated by the €7.5 billion leveraged financing backing the carve-out of Opella from Sanofi. As a result, bankers agree, investors are unlikely to see any major shift in conditions in the new year.
“Valuations have increased as there is more pressure on GPs to return funds,” said a banker. “But this won’t be a flood. A lot of 2019/2022 transactions were sold at high valuations and high leverage, and with business plans that assumed significant growth that hasn’t come to fruition,” he concluded.
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