The past two weeks have jolted many participants in Europe's leveraged finance market. Deals such as Britax and WorldPay showed investors in Europe that some corporate issuers are all too happy to leave their home markets to achieve the best deals.
Britax, the UK car seat manufacturer, issued the large majority of its £353m-equivalent debt in dollars. WorldPay, the UK online payments company, considered borrowing in sterling, but the 50bp gap in pricing between the dollar and sterling tranches convinced it not to.
Now Exopack — a holding company which owns an American and four European packaging subsidiaries — is also deciding how much of its new loans to issue in euros. If investors in Europe prove too strict, it is likely to rely mainly on the US market.
Of course, European borrowers had done transatlantic deals in the past, sometimes even US-only deals. But this trend has grown more common. Dealogic showed last week that deals in dollars made up 29% of total European leveraged loan borrowing so far this year. The issuance of non-euro European loans has reached its highest level since 2008.
There is no reason to grow defeatist, however. Lenders can avoid further haemorrhaging by the European leveraged loan market. But to do so, they must grit their teeth and accept conditions usually only seen in the US.
When Oxea issued €1.1bn-equivalent of transatlantic loans in June, investors in Europe were so flexible on terms and pricing that the German chemicals firm chose to increase the debt’s euro tranche by €250m to €450m. The euros priced only 25bp wider than the dollars, and both tranches were covenant-lite.
Until the pace of mergers and acquisitions picks up, the supply-demand balance in the European leveraged loan market is likely to continue to favour issuers. And if these issuers can also turn to a hot US market, investors in Europe, if they want to do deals, will have to be tolerant and make compromises, as they did with Oxea.
Investors in Europe have funds they need to put to work. They had better invest the money on borrower-friendly terms than not invest it at all.
