Jumbo levloans just make mid-market emptiness echo louder
The leveraged loan market has hosted some atypically big M&A deals over the last few months, including most recently €7.5bn for DE Master Blenders. But these attention-grabbing deals cannot hide the continued paucity of deals in the mid-market.
DE Master Blenders is set to raise €7.5bn equivalent to finance its merger with the coffee business of Mondelez International, coming in a month after Numericable’s €16bn high yield bond and leveraged loan deal.
These deals are a boon for the leveraged finance market, and it’s easy to be swept up in the wave of confidence that came with the loans.
But under the surface, the market is not in the rude health that these jumbo deals seem to suggest.
Leveraged deals between €200m and €450m — roughly considered to be the mid (or bread and butter) market — totalled just €62.2bn in the first quarter of this year, according to Dealogic data. This volume is the lowest quarterly figure since the second quarter of 2012 when leveraged borrowers signed €61.7bn of loans.
Few lenders or investors are particularly concerned about skinny mid-market numbers yet. Indeed, there is a strong belief in some corners of the loan market that high profile deals can spur on the wider market.
But deal volume for leveraged loans of more than €500m has also decreased year-on-year in the first quarter of 2014. Leveraged borrowers signed €195bn in the first three months of 2014, down from €227bn for the same period in 2013. As with the mid-market, it’s hard to see any evidence yet that large deals like DE Master Blenders are encouraging the market to pick up.
Even among the deals that have got done, secondary buy-outs and refinancing deals are more common than new paper. Until a strong supply of new deals comes to the market, any talk of good health is premature.
Aside from M&A, it’s tough to see where new deals may come from. Growth in Europe is still low, with the IMF predicting growth of around 1% in the Eurozone area this year, so it’s little surprise that corporates have few new money reasons to come to market.
Even in the refinancing market, many leveraged corporates have come out of the global financial crisis with strong balance sheets, following restructuring or cheap money refinancings they have already completed. Here, too, it is hard to see where a spike in supply will come from,
It’s a hugely positive step that the leveraged loan market can mobilise the huge sums of money it can for Numericable and (hopefully) DE Master Blenders, but lenders should not get caught up in the hype of big deals, as it is the mid-market that pays the bills.