European Leveraged Loan Market Faces €260 billion Refinancing Wall from 2014
From Fitch Ratings
The European leveraged loan market faces over €260 billion of non-investment grade corporate loan maturities from 2014 according to new analysis based on Fitch’s rated portfolio of approximately 270 leveraged credits.
The deleveraging of the European banking system is the fundamental factor raising doubt over the ability of many legacy leveraged borrowers to meet their refinancing requirements as principal maturity payment dates approach.
Fitch’s portfolio includes many domestic incumbents and international leaders (in what are often niche industries). Despite high initial leverage and the 2009 recession, these credits – typically rated in the ‘B*’ category – continue to generate cash and deleverage. Consequently, these borrowers are stronger candidates for secondary buyout, strategic sale, IPOs as well as a high-yield refinancing.
However, 50% of the issuers in Fitch’s portfolio are rated ‘B-*’ and below and have median total leverage higher than 6.5x, which is off-market compared with recent primary loan and high yield transactions. Looming debt maturities, high leverage and weak cash-flow generation are compounded by high business risks, excess capacity, technological substitution or regulatory change which means that material deleveraging is unlikely by the time maturities come due.
Consequently, Fitch expects issuers in this category to attempt to reduce leverage with more A&E negotiations, debt buybacks, equity cures and, potentially, partial debt write-downs. Additionally, approximately half of these ‘B-*’ and below rated issuers tend to be in highly cyclical industries like chemicals, broadcasting and media. It is unlikely that the refinancing of these companies will be supported by mid-high EV multiples.
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