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Europe’s levfin markets are in a slump—don’t say we didn’t warn you

In May, issuance volumes reached just €7.5 billion across all financing types, comprising €3.7 billon from eight bond deals and €3.8 billion from seven loan issues.

The €13 billion total for loans in the first two months of Q2, meanwhile, pales in comparison to the historical average of €31 billion typically seen in Q2 (excluding 2020).

Institutional loan issuance has wilted month on month since the start of 2022. A little over a year ago, a record €24.7 billion was raised in March alone. That flopped to just €2.1bn in May.

What does this mean for corporates considering their levfin options?

1/ It’s all about the new money

This drop-off in activity is most acute in refinancing. In May, not a single institutional loan was priced for refinancing purposes, the €2 billion raised being exclusively new money. Even then, €2 billion is not much to shout about.

It’s been a similar story for much of this year. In the first five months of 2022, 90% of loans have been new money, the highest level on record, largely used for private equity buyouts and M&A that had already been completed.

As such, buyouts alone in 2022 to date represent a higher portion of overall financing than all refinancing activity combined.

The secondary loan market looks equally weak, dropping to lows not seen since 2020. As at the end of May, the weighted average bid on institutional facilities sat at 93.98 and the percentage of loans trading at par-plus levels was less than 1%.

2/ A downturn in levfin may hit employment levels in finance 

The beaten down leveraged finance market in Europe is impacting recruitment plans among banks. According to a report by eFinancialCareers, head-hunters are seeing hiring activity waning with only essential hires being signed off on, as leveraged finance fee income grinds to a halt in the banking sector.

Currently, firms are freezing their head counts. If the situation continues through Q3, it is expected that job cuts will follow towards the end of the year.

It’s difficult to see a catalyst that will turn this around in the short term. On 29 June, European Central Bank member Robert Holzmann said there is ample room to hike rates as the ECB prepares for its first base rate increase in 11 years.

Given the impact on debt markets that the mere prospect of forthcoming raises has had, many would beg to differ.