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European corporates skip leveraged financing while PE turns up the heat

You can tell a lot about what’s happening across Europe’s M&A landscape by looking at the debt markets. If leveraged loan activity is anything to go on, we’re in a drought—and that’s putting it mildly.

Issuance for corporate M&A fell dramatically in the first four months of 2022 to €3.5 billion, a full 80% markdown year on year.

It’s a clear sign of where corporate priorities lie right now, amid persistent inflation and an economic slowdown in Europe, both exacerbated by the war in Ukraine.

What does this mean for corporates in the coming months?

1/ When the going gets tough, PE gets going 

Amid this turmoil, PE is pulling more than its weight. Leveraged loan buyout activity has clocked in at €14.1 billion year to date, down just 5% year on year. PE funds are proving to be resilient, which offers a degree of comfort to companies seeking a financial sponsor.

Against the backdrop of war, however, these sophisticated investors are having to stomach higher financing costs for their deals. Thus far in Q2 2022, for example, the weighted average pricing on institutionally placed leveraged loans sits at 533bps, just above the previous peak seen at the start of the pandemic in Q2 2020.

2/ Broken bonds show no sign of recovery anytime soon

If PE continues to carry both M&A figures and leveraged financing activity for the foreseeable future, it’s unlikely that high yield bond markets will see much of this action.

Across all use of proceeds, from M&A to refinancing and everything in between, less than €4 billion was raised across March and April, the lowest bimonthly period in the past five years excluding March and April 2020 at the onset of the pandemic.

That isn’t expected to pick up any time soon, with the predominantly fixed-rate instrument struggling with the prospect central bank tightening.

The Fed and Bank of England have already started hiking their rates and the European Central Bank is expected to follow suit before long. With this on the horizon, investors are loath to be locked into fixed payments.

Indeed, 18% of high yield bonds this year have featured floating-rate coupons, compared with 12% in 2021 and just 8% in 2020.

It’s clear that investors and corporates alike have a firm eye on inflation, interest rates and, frankly, surviving this trying period. PE, meanwhile, is for the most part taking everything in its stride.