European loan market – review and outlook

20 min read 20 Feb 20

Summary: Though duration was the friend of fixed income in 2019, the lack of duration in the floating-rate loan did not detract from its appeal and the market again exhibited fewer wild swings than other asset classes – but will 2020 bring more of the same? In this paper, our Leveraged Finance fund management team share their views on the dynamics that drove the European leveraged loan market in 2019, and discuss the prospects for the asset class this year.

Baseline 2020 view:

  • We expect new-issue loan pricing to remain in the medium-term range, +350-450bps over Euribor. There may be occasional wobbles in wider financial markets – that could filter through to the loan market and create short-lived secondary opportunities – but only a protracted period of macro-economic difficulty would materially affect issuance and primary pricing. High running income should continue to provide key support to loans.
  • We anticipate loan issuance in the range of €80 to €100 billion (in gross terms) this year. The European loan pipeline started the year at over €15 billion, spread across more than a dozen names.
  • There were a number of take-private deals last year, a trend that could well persist in 2020, such is the size of the dry powder of sponsors.
  • Demand should remain strong but not excessive. We expect issuance in the CLO market to be slightly lower than 2019, at €25 billion, as the arbitrage is somewhat stretched, with loan margins at the tighter end of their range and as due diligence requirements of investors mount. Institutional flows should remain steady, attracted by high running income yet moderated by the end-of-cycle credit environment.

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.