The obvious claim that 2020 has been a year of unprecedented challenges doesn’t need to be explained. Much like other industries, the leveraged loan market has felt the impact of Covid-19 outbreaks and lockdowns (especially in the first and second quarters), as global travel has ceased and companies in certain industries have shut down, making due diligence, evaluation and conclusion of an equity agreement virtually impossible. This activity phased out in 2020 caused pent-up demand, which, together with low funding costs, led to a busier year forecast for sponsor-backed mergers and acquisitions in 2021.
Below, we take a look at the current trends and market outlook for leveraged lending activity in each of the Asia Pacific, Europe, and North America regions. With leading banking and finance lawyers working in nine offices in these regions, Ogier is well positioned to provide expert advice on the laws of the British Virgin Islands, Cayman Islands, Guernsey, Jersey and Luxembourg on this issue. which concerns leveraged financing operations.
After a slow start in Q1 and Q2 (for the reasons mentioned above), while the second half of 2020 did not quite see a return in the volumes of pre-pandemic operations, during this period, the Asian leveraged loan market has shown its resilience. Indeed, some major event financings, particularly in South East Asia, have kept the overall overall transaction value in line with 2019 levels. Other contributors to leveraged lending activity in the region Asia in 2020 was the financing of private companies backed by private capital from public stock exchanges and the real estate sector in China.
Market players predicted a stronger start to 2021 as the deployment of the Covid-19 vaccine began, a more optimistic view of the geopolitical context prevailed and lending rates remained low. So far, M&A activity in Asia-Pacific in 2021 has met these expectations and, according to an August 23, 2021 EY press release, âM&A activity in Asia-Pacific hit a record high in the first six months of 2021. Values ââtargeting the region rose to US $ 535 billion, from US $ 284 billion in the same period last year. “
There have been a number of sponsor-supported acquisition processes in Asia so far this year. Strong liquidity in both the private equity and banking sectors means these have been very competitive, with sponsors often paying historically higher multiples for assets and, at the same time, demanding higher leverage ratios. their financials and an increase in the debt portion of their acquisition consideration.
An improved exit environment, which has been difficult for private equity in recent years, means that some of these deals are tied to the divestiture by existing investment sponsors. However, sectors such as tech, fintech and healthcare, which are seen as resistant to Covid and stand the test of time, are among those that are attracting the interest of private equity firms looking to research. new targets.
The general feeling is that (aside from the slowdown in the Chinese real estate sector) leveraged lending activity in Asia-Pacific will remain strong through the end of the year.
Leverage loan market activity in Europe rebounded strongly in 2021 following the challenges of 2020. boost private equity activity in the region and with this leverage loan demand continues to grow.
The weak cycle of interest in which we currently find ourselves deserves special attention. It appears to be driving activity on two fronts. First, by making institutional investors seek higher yields, and second, by making borrowing as attractive as it may never have been. It will be interesting to see how inflation fears in Europe, and in particular the UK, are handled by central banks over the coming months, with some believing that key rate hikes are inevitable.
It also appears that further development of the private credit market could stimulate activity in the European leveraged loan market. An increasing amount of ‘non-traditional’ debt is available, including through private equity funds established with an investment strategy of challenging traditional debt providers, which adds and increases price competition. expected returns for leveraged buyback transactions.
The perception that the stock prices of many listed companies were depressed, which made them attractive proposals for private equity managers, further fueled the fire, at least in the first half of 2021. In the UK, attention Special attention has been paid to supermarket chains, in particular because of their generally large real estate footprint and the opportunities to create efficiencies in their supply chains. Asda and Morrisons are both high profile examples. Although specific to the UK, there continues to be a perception that asset values ââare attractive due to Brexit and a relatively affordable pound sterling as well, which perhaps leads capital managers -investment to deploy capital in the UK market rather than in the US or the US. Asia.
As a result, UK buybacks increased by around 60% in the first half of 2021 compared to the same period in 2019, and by 14% across the EU.. It remains to be seen whether these levels of activity are sustainable, both economically and politically. Regarding the latter, there seems to be little appetite to temper activity with political intervention at this time.
For now, the European leveraged loan market continues to liven up and a good end by 2021 is expected.
When the pandemic first took hold in March 2020, the leveraged U.S. financial market felt the immediate impact, sectors such as airlines, accommodation and entertainment, gaming, retail non-food retail and automotive supplies being hit hard. Over the year, the market has experienced a steady recovery. The CARES (Coronavirus Aid, Relief and Economic Security) law was passed, protecting many companies from the immediate impact of the pandemic, as well as a number of companies consolidated their finances, going into debt to provide liquidity in the face of uncertainty.
The start of 2021 saw this recovery accelerate. The issuance of leveraged loans increased by 60% in the first half of 2021 compared to the same period in 2020. A large part of the market activity in the first quarter of 2021 concerned repricing and refinancing operations which, according to Fitch, accounted for 74% of total emissions in the first quarter.. Activity declined slightly in the second quarter, but the market saw a noticeable increase in new money transactions (a 42% increase from the previous quarter).
In terms of sectors, technology, media, telecommunications and healthcare have performed relatively well during the pandemic. Even initially hard hit sectors, such as those described above, have shown signs of recovery. The deployment of vaccines and the opening of the economy have undoubtedly made a difference. Also, it appears the drawbridge has been lowered and banks have moved away from downside risk protection to offer competitive pricing. This change occurred in a low interest rate environment and led borrowers to take advantage of favorable market conditions.
There are other factors supporting the recovery of the US leveraged loan market in 2021. Institutional investor appetite for stable yield is high in this long period of low interest rates. This has been seen in the secured loan bond (CLO) market which itself has recovered since it was initially hit by the pandemic. In the first half of 2021, new issues of CLO US amount to $ 82.35 billion (compared to $ 91.76 billion for the year 2020). This is important because CLOs hold a large share of the leveraged loan market and it is clear that one market leads to another.
The market outlook for the last quarter of 2021 remains positive. At its September meeting, the US Federal Reserve kept benchmark interest rates close to zero, but said rate hikes could come sooner than expected and the cut could start as early as November of this year. . This could lead to a year-end rush on leveraged finance deals as companies seek to hedge against interest rate hikes. Another important consideration as we approach next year is the increase in the rate of inflation. Most commentators agree that this is likely due to factors related to the pandemic and is expected to subside over time, however, the extent of this remains to be seen.
Finally, an interesting development in the leveraged loan market to watch in 2022 is the impact of the Biden administration’s focus on climate change. Most market participants agree that we will see an increase in the inclusion of so-called âESGâ clauses in debt documentation. Over the past two years, ESG has been integrated into the business plans and strategic priorities of lenders and borrowers. This is a trend that will become more and more important as we move forward.