European leveraged issuers need to watch the US
European leveraged loan issuers expect the good times to keep rolling this autumn. But issuers considering cross-border transactions should be cautious. Domestic supply is building in the US and this could mean lenders push back on margins.
Right now is a good time to be a leveraged loan borrower. Few participants see the balance of power shifting to lenders any time soon. Loose terms and tight pricing is the order of the day in the European market.
But this will be harder to achieve if the same borrowers are including dollar tranches on their loans. When US investors can take their pick in their domestic market they can prompt push-back on European led deals.
Think Flint. And Deoleo. Both are well-known and well-liked credits in Europe. But both saw their deals get complicated when faced with heavy competing supply in the US market.
Flint widened margins on the euro and dollar tranches of its €1.5bn-equivalent loan after supply-induced indigestion hit the US market and forced the euros to move in sync.
While Deoleo held onto initial margins on its €600m refinancing loan, it did so at the cost of dropping all dollars from the deal, after it marketed an even split of currencies when it issued guidance.
Deoleo dropped the dollar tranche after US investors, spoiled for choice in their home market, decided to stay away from what they saw as overly tight pricing on a Spanish credit.
Looking at issuance volumes makes the point clear. According to Dealogic data, the deal volume of US leveraged loans was $92.68bn in May, when Flint issued, and $93.83bn in June, when Deoleo issued.
In July, US supply dropped to $74.25bn, allowing Iglo to raise 20%-30% of its €1.7bn deal from US investors who wanted to add European assets to their portfolios.
European volumes also dropped in July, with $25.82bn issued against a frenetic $44.2bn in June, but this was above the $20.04bn issued in May, giving US investors seeking supply a reason to turn to Europe without pushing for better terms.
With a huge US pipeline said to be building for September, European borrowers need to take a long hard look across the Atlantic before they add a dollar tranche to their deals.