LONDON (Reuters) - Total leveraged loan and bond issuance reached a new record in Europe in 2017, data showed, driven by companies refinancing debt to take advantage of low interest rates and borrowing to fund special payouts to shareholders.
According to data from LCD at S&P Global Market Intelligence, lending to non-investment grade entities or lending to speculative-grade companies, rose to 214 billion euros (190.63 billion pounds) in 2017, eclipsing 203 billion euros in 2007, at the height of the credit boom.
Since the financial crisis, low interest rates in Europe have flooded alternative investment classes with capital searching for yield. As a result a lot more of the risk from these assets may have been passed down to people’s pensions and savings.
“In the great world of financial engineering, it’s hard to have self-discipline,” said Peter Hahn, professor at the London Institute of Banking and Finance.
“If the demand is great, Wall Street can manufacture products to meet it, which is why we are seeing demand coming from dividend recaps and refinancings.”
Opportunistic refinancings and dividend recaps - borrowing to fund special payouts to shareholders - made up the bulk of activity for the year, at 59 percent of overall volume, split 15 percent for recaps and 44 percent for refinancings.
In 2016 opportunistic deals represented 45 percent of the overall volume compared with 37 percent in 2015.
Dividend recaps reached a record high of 21.4 billion euros, surpassing the 2007 total of 20.3 billion euros.
Larger high-profile buyouts from private equity firms hit debt markets in recent months including to finance the acquisition of payments systems companies Nets and Paysafe, as well as drinks maker Refresco, pharmaceutical company STADA, and business services firm TMF. This helped make the second half stronger in terms of leveraged borrowing.
Since the financial crisis, regulatory requirements have meant banks have distanced themselves from a lot of riskier lending. Smaller providers, including the debt fund arms of private equity firms themselves, have stepped into the gap.
The pricing of debt has also reached record lows, while a higher percentage of loans are seeing interest rates or fees on offer to investors cut or increased during syndication: a record 37 percent of these cases favoured the issuer of debt.
As the market has heated up in recent years, traditional loan terms which provided protection to lenders in a downturn have been scrapped and been replaced with looser and lighter covenants in the loan market.
“In the event of a downturn, the flexibility that sponsors enjoyed to grow their investments could make enforcement more challenging for lenders and bondholders,” said Philip Crump, Partner and head of law firm DLA Piper’s Leveraged Finance team in London.
“In that scenario the winners would probably be the distressed funds, that are currently sitting on the sidelines, and those lenders that have maintained discipline in terms of credit and legal analysis.”
Reporting by Dasha Afanasieva, editing by David Evans