The rotation in the region's debt market continues. In this market overview, Mathew Cestar, Co-Head of Global Credit Products in EMEA at Credit Suisse provided an assessment of how the European debt markets are evolving away from banks toward institutional-based relationships.
In the wake of ongoing bank deleveraging, dramatic growth in high yield issuance is now being followed by the institutional loan market. Mathew Cestar summarises how this may impact alternative sources of financing for German borrowers at Mergermarket's Germany Forum 2016.
Here is a summary of seven key themes in Europe's leveraged finance market according to the presentation by Credit Suisse:
- The structural shift in the way European companies finance themselves continues to play out with bank regulations forcing an increasing number of corporates to seek financing in the public capital markets rather than loans from commercial banks.
- This trend is most pronounced in the high yield bond and leveraged loans markets which have seen spectacular growth as a growing number of more highly-leveraged companies access funding from big institutional investors instead of banks.
- The European debt market has been outperforming the US and is expected to continue to be very attractive to investors largely due to divergent monetary policy scenarios, with the US tightening monetary policy and Europe sticking with low rates while the ECB continues its program of quantitative easing.
- Loan markets have been the instrument of choice to finance M&A deals in the past year due to their flexibility and low cost, with European leveraged loans outperforming, and we expect this to continue in 2016.
- The outstanding issuance of European investment grade corporate bonds have grown by over 75% since the end of 2008, as Euro-area banks have deleveraged and euro area bank assets as a have declined as a percentage of GDP. Along with M&A financing transactions that have dominated corporate issuance so far this year, such scaling back of traditional bank lending will continue to support investment grade new issue volumes throughout 2016.
- Allocations to direct lending by large sophisticated institutional investors is increasing: there are now over 50 active direct lending funds in Europe, up from 9 reported at the end of 2009. With the significant “dry powder” available to private debt funds, we expect continued growth in their loan underwriting to European mid-market borrowers.
- Germany has been the third largest market for leveraged loan transactions to middle-market borrowers after the UK and France since 2012. Ongoing improvements in German insolvency regime will support this trend going forward.
You can download the slides for this presentation below or watch the full video recording of the presentation, including the audience Q&A.
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