First quarter 2016

LCD European Quarterly

Buyout financings dominated loan issuance in 1Q16... …but issuers were forced to pay up to fill the books…
€35B E+700
Sponsored Not sponsored Spread OID over 3 years Euribor floor benefit
€30B E+600
€25B
E+500
€20B
E+400
€15B
E+300
€10B
€5B E+200

€0B E+100
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

…amid sparse repayments... ...and a slow start for CLO creation.

€9B €2.5B
€8B
€7B €2.0B
€6B
€5B €1.5B
€4B
€1.0B
€3B
€2B €0.5B
€1B
€0B €0.0B
Mar Jun Sep Dec Mar Jun Sep Dec Mar Mar Jun Sep Dec Mar Jun Sep Dec Mar
2014 2014 2014 2014 2015 2015 2015 2015 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016
Source: S&P ELLI Source: S&P ELLI

But Europe recovered equilibrium after a volatile spell… …giving hope for smoother waters in 2Q16.
1,005 €7B
European forward pipeline volume
€6B
1,000
€5B
995
€4B
990 €3B
985 €2B
ELLI YTD total return excluding currency
980 €1B
€0B
975 Apr May Jun Jul Aug Sep Oct Oct Nov Dec Jan Feb Mar
1/1/16 1/21/16 2/10/16 3/1/16 3/21/16 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2016 2016 2016
Source: S&P ELLI

Inside

2 Europe moves back into black 7 Pipeline pick-up

4 CLOs: Mezzanine swings blight issuance 8 First-lien bears leverage burden
5 New issuance relies on buyouts 8 High-yield volume shrinks, but gets ECB boost
6 European borrowers stay at home 10 Phoenix from the flames
First quarter 2016 LCD European Quarterly

Europe recovers equilibrium to close 1Q16

in the black with €13B of new issuance

Chart 2: ELLI YTD total return excluding currency

M arket sentiment took a turn for the better towards
the end of the first quarter. The ECB announcement
in mid-March — combined with inflows into
1,005

European and U.S. high-yield funds, and even an inflow 1,000

into U.S. loan funds — brightened the mood, and the
arrival of new issuance in the loan and bond markets
helped lift investors’ spirits, landing Europe back in price- 995

discovery mode.
990
All this meant players in Europe moved towards the Easter
break in a more upbeat frame of mind, after a grim spell in
985
February and early March that resulted from a soft secondary 1/1/16 1/11/16 1/21/16 1/31/16 2/10/16 2/20/16 3/1/16 3/11/16 3/21/16
and a stalled CLO market. Source: S&P ELLI

The secondary market has been recovering after a brief but

steep dive in early February, during which the bid-offer
spread of the flow names widened to 100 bps — a level not
seen since January 2013. “The market turned very negative
very quickly, and now it has bounced back very quickly,”
says a fund manager.
By contrast, at this time last year the ELLI had returned
roughly 2%, on its way to a strong full-year result of 4.62%.
Chart 3: Annual returns
6%

4%
Chart 1: Average bid and bid/ask spread of LCD’s flow names
101 120 bps 2%
Bid/Ask spread Ave. bid
0%
100 90 bps
-2%
ELLI S&P/LSTA Index
99 60 bps -4%
BAML HY (HE00) FTSE100

-6%
98 30 bps 2015 YTD 3/28/15 YTD 3/28/16
Source: S&P ELLI, S&P LLI,
BofAML European HY Index
97 0 bps
Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16
Now the question is how strong the bid will be for the next
round of issuance. Market players say they expect new-issue
pricing to tighten a little around OIDs, on the assumption of
Indeed, one fund manager says that a danger now is a sudden
burst of exuberance and a blind haste to book primary assets Chart 4: Average all-in TLB spread of European B-rated loans
that leads straight back down the road to overly aggressive
E+700
debt structuring and insufficient flex language. “We learn, Spread OID over 3 years Euribor floor benefit
and we forget,” an arranger says. E+600

E+500
From the perspective of the S&P European Leveraged Loan
Index (ELLI), Europe reached the end of the first quarter in E+400
the black, to the satisfaction of fund managers. “If we can
come out of the quarter broadly flat, that would be a good E+300
outcome for the asset class,” said one.
E+200

As of March 28, the ELLI’s year-to-date return for 2016 was E+100
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
0.45% (excluding currency), having clawed its way back
into positive territory after several weeks in the red.

2
LCD European Quarterly First quarter 2016

a more stable market. Single-B TLB all-in spreads for 1Q16 Thanks to this low rate of repayments, at the same time as
stood at E+605 on average, up 20 bps from E+585 in 4Q15. a bout of primary issuance that included some new names,
the European loan market expanded in size during the first
An unusually large piece of this movement came via the quarter.
OID, as certain deals had to pep up their offering to clear
syndication. Chart 7: ELLI par amount outstanding and issuer count
€110B 240
Chart 5: Percentage of institutional flexes moving up/down €105B 235
100% €100B 230
Flex down Flex up
75% €95B 225
50% €90B 220
25% €85B 215
0% €80B 210
-25% €75B 205

-50% €70B 200

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
-75%
Par amount outstanding (€B) Number of issuers
-100% Source: S&P ELLI
Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
Chart shows what % of all flexes done in each month moved pricing higher or lower

The prospects for CLO creation

Whether the second quarter will bring a broad tightening in
clearing yields will in part depend on whether repayments
roll in and help drive demand, and on whether the recent
pick-up in CLO creation opens the doors for more managers
to price new vehicles.
Repayments have been unusually low in the first quarter,
and most deals that repaid were replaced by a new financing.
The partial repayment by Jacobs Douwe Egberts was
quickly redeployed into a busy primary and weak secondary
market, sources said.
As for CLO creation, the prospects here have brightened,
although putting all the pieces of the CLO puzzle together
and solving for risk retention remains difficult.
The high cost of liabilities in the first quarter, combined with
the familiar regulatory hurdles, resulted in severely subdued
issuance and led some banks to trim their forecasts for full-
year CLO issuance to €10 billion.
Chart 8: Monthly CLO issuance
€3.0B
€2.5B

Chart 6: Monthly repayments €2.0B

€9B
€1.5B
€8B
€7B €1.0B
€6B
€5B €0.5B

€4B €0.0B
€3B Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
€2B Source: S&P ELLI

€1B
€0B
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
Source: S&P ELLI
Looking ahead, Icopal is set to be acquired, so investors
anticipate a repayment here, and First Data may also make
a partial repayment.
But as of late March there was no imminent reason to expect
a sudden influx of cash needing to be re-housed.
After spinning out earlier in the year, mezzanine spreads
have tightened somewhat, but it is still unclear whether the
overall cost of liabilities will tighten sufficiently to improve
the arbitrage and make European CLO equity attractive
versus what’s available in secondary.
The question of what would happen to warehouses if CLO
issuance did not start moving again has loomed over the
market this year, although a vicious cycle of unwinding was
deemed unlikely. The hope is that CLO issuance will recover

3
First quarter 2016
some momentum, to lighten the warehouse queue and fuel
the loan bid from this key part of the investor universe.
Arrangers argue that CLOs make up a smaller share of the
institutional universe than they once did, so the fund bid does
not rely so much on whether or not this market is firing. And
indeed, amid the long-term low-yield environment in Europe,
money has continued to flow into loan managers’ hands outside
the CLO product, with certain firms winning large SMA
mandates during the quarter, according to market sources.
Chart 9: Primary market by institutional investor type
100%
80%
60%
40%
20%
0%
2010 2011 2012 2013 2014 2015 LTM
31/03/16
CLO managers Finance cos/Insurance/Prime funds Credit funds/SMAs
CLOs: Mezzanine swings blight issuance
Volatility was singled out as a major theme across all markets for 2016,
but few predicted the huge swings in CLO liabilities that plagued that
market in the first quarter, Sarah Husband writes.
Although spreads at the top of the stack have remained sticky — around
150 bps area — mezzanine spreads ballooned in the first quarter, with
BBBs touching wides of 570 bps in secondary (from 413 bps at the
start of the year), and BBs crossing 900 bps (from 636 bps in January),
according to Markit. Meanwhile, single-Bs are so prohibitive that these
have not featured in the majority of CLO transactions on both sides of
the Atlantic this year, and in Europe both BlackRock and CVC Credit
Partners removed the single-B tranche from their European CLOs.
All this movement has meant that an already challenged CLO arbitrage
has become yet harder, further reducing demand for the equity tranche,
and bringing primary issuance to a near standstill during the first two
months. With just two transactions pricing through the end of February,
both Morgan Stanley and Deutsche Bank scaled back their CLO supply
forecasts for the year to €10 billion, while anecdotally there were fears
around the market that the final number could be lower still.
And then came the March rally, with the improved market sentiment boosted
further by the ECB’s bazooka. CLO liability spreads finally caught a bid as
investors stepped in at the wides, and primary market prospects looked up,
enabling another transaction — CVC Credit Partners — not only to price,
but also to tighten its cost of funding through the marketing process.
4
LCD European Quarterly
One characteristic of Europe’s institutional bid that can make
syndications hard to call is the fact that a lot of firepower is
concentrated in the hands of a few large players — primarily
those that are dominant in both CLO and non-CLO asset
management. “Demand is coalescing in the hands of a small
number of funds,” confirms an arranger.
Traction with a couple of these anchor investors can give a
huge boost to any syndication. But these big-ticket players
can be unpredictable, and if none of them steps up then
syndication can suddenly become much more difficult,
sources say.
In a volatile market — and especially when the CLO bid
is uncertain — their support can be crucial. And this fact
is not lost on the managers themselves when it comes to
negotiating terms in an early bird phase, or pushing back on
unfavourable documentation.
Away from fund demand, banks have again proved
their mettle in the first quarter — and some have notably
increased their appetite for the loan product. A few have
stepped up with big tickets on 1Q16 deals, but across the
board, especially on covenanted deals, they have been useful
asset-takers.
Some other positive developments could also support issuance,
including the potential for a combination of negative interest rates in
Japan and cross-currency swap dynamics to ramp up demand for
European CLO AAA paper.
Furthermore the February rout enabled CLO managers to switch out
lower-yield loan assets for higher-yield new-issue paper, at least partially
offsetting the wider liability spreads. And the warehouses opened this
year that are able to ramp slowly only with higher-yielding loan assets
should prove yet more attractive as they make their way to market.
More pricings came at the end of March to further support the positive
tone — namely from BlueMountain, Rothschild, CVC, Commerzbank
DFM, and 3i. This flurry boosted first-quarter supply to €2.6 billion, from
seven deals.
Despite this pick up however, February’s dislocation has instilled a
sense of unease among players, as having gapped out so strongly on
little other than fear — and contagion from the U.S. — Europe’s CLO
market is not the low-volatility asset class it was presumed to be. And
with additional volatility likely to come ahead of the Brexit vote next
quarter, some investors are re-evaluating.
“February was a very scary experience as spreads moved out of control
based on little else but fear,” said an investor. “BBB, and BB bonds
still offer good fundamental value, but investors need to consider the
volatility we have seen in recent months.”
LCD European Quarterly First quarter 2016

Sibling rally New issuance relies on buyouts

Beyond the internal workings of the European loan bid, the From the perspective of primary loan issuance in the
swift rally in U.S. leveraged loans is also good for Europe European market, the first quarter of 2016 was something
overall. of a one-trick pony.

The S&P/LSTA Index rallied in March, and is now back in The market saw a wave of buyout activity in January, but
the black, thanks to better technical conditions and investor there was very little else until right at the end of the quarter.
sentiment, plus a stronger conviction around economic
growth. Rising oil prices have helped, with the Oil & Gas Although the stop-start nature of the quarter’s activity was
sector playing a key role in the U.S. Index’s health status. disheartening at times for both arrangers and buysiders, the
eventual new-issue volume was not too disappointing, and
Chart 10: US loans: YTD Index levels reflects the fact that Europe quickly recovered its equilibrium
1,050 after a spell of weakness in secondary.
All Loans Index O&G Index
1,000 Total loan issuance — both sponsored and corporate —
amounted to €13.3 billion in the first quarter of 2016, down
950 9% from the closing quarter of 2015, and the weakest
reading for any first quarter since 2012.
900
Chart 12: European leveraged loan new-issue volume
850 €35B
Sponsored Not sponsored
€30B
800
1/1/16 1/11/16 1/21/16 1/31/16 2/10/16 2/20/16 3/1/16 3/11/16 3/21/16 €25B
Source: S&P/LSTA LLI
€20B

€15B
In light of this situation, relative value has become less
strongly in favour of the larger market. €10B

€5B
Chart 11: Discounted STM of B-rated first-lien loans
€0B
800 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

750
ELLI LLI
700 Sponsored financing was certainly the bright spot — and
that meant buyouts, including new as well as familiar
650
businesses, rather than opportunistic transactions.
600

550 Thanks to a busy January — during which deals put together

in the fourth quarter reached syndication — buyout loan
500
volume totalled €8.7 billion in the year through March 31.
450
Jan 2015 Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 Jan 2016 Mar 2016
Chart 13: Sponsored European leveraged loan new-issue volume
Source: S&P ELLI, S&P/LSTA LLI
€25B
Buyouts Refi/Recap-dividend Other
In March, a trio of cross-border financings retested the €20B
relationship between clearing yields for dollar and euro
tranches. In the end, Blount pulled its euro tranche, but both €15B
Western Digital and Diebold upsized their euro tranches
and priced them tighter than the dollars. €10B

Meanwhile, the European high-yield market found its feet €5B

after a wretched start to the year (see high-yield section on
p. 8). A tentative improvement in sentiment in that market
€0B
was helpfully cemented by the ECB statement in mid- 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
March, and a burst of primary issuance ensued.

5
First quarter 2016 LCD European Quarterly

Cross-border loan volume (€B)

U.S.-domiciled borrowers European-domiciled borrowers Total
Loan raised in U.S. Loan raised in Europe Loan raised in U.S. Loan raised in Europe
1Q15 1.5 0.5 5.0 6.4 13.3
4Q15 2.9 1.1 2.9 1.7 8.5
1Q16 17.3 3.3 0.0 0.0 20.6
Source: S&P LCD

This was the highest reading for buyout loan volume since
the third quarter of 2008.
January’s momentum did not carry into the rest of the
quarter, however. The pipeline emptied quickly, and was
slow to refill as volatility took hold in February and the cogs
of the M&A cycle turned slowly. So after nearly €7 billion
of buyout-related supply in the first month of the year — the
strongest single month since July 2008 — activity fizzled
out to roughly €1 billion in February, from only three deals.
Chart 14: European leveraged loan new-issue volume
€14B
Buyout
€12B
€10B
€8B
€6B
€4B
Driven firstly by January’s supply — and then by a modest
flow of M&A-related deals that emerged in March — the first
quarter’s total M&A volume reached €11 billion. This is down
from 1Q15, when €12.9 billion launched to syndication, but it
beats all previous first quarters since 2007.
However, high all-in spreads and that mid-quarter bout of
volatility kept a lid on opportunistic transactions. The only
sponsored opportunistic transaction of the first quarter came
in the form of the €1.125 billion TLB to support a dividend
recap and refinancing for Action Netherlands, which
allocated in February. In terms of volume, this is the lowest
reading for any first-quarter period in the last four years.
Other
European borrowers stay at home
During the first quarter, the difficult market conditions in the
U.S. kept all European borrowers in the domestic market. As
the table above demonstrates, all cross-border supply came
from U.S. borrowers reaching across the Atlantic, but not
the other way around.

€2B
This is the first time since the fourth quarter of 2011 that
€0B euro- and sterling-denominated cross-border loan supply
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
has come exclusively from U.S.-domiciled borrowers.

Chart 16: Euro- and sterling-denominated cross-border loan volume

There was then a long and awkward pause while the €14B
secondary market had a tantrum, but by mid-March Issuer domiciled in U.S.
€12B
conditions for new issuance had improved as secondary bids Issuer domiciled in Europe
regained ground, and another roughly €1 billion of buyout €10B

paper came to market. €8B

€6B
Chart 15: European leveraged loan new-issue volume
€4B
€35B
M&A Other €2B
€30B
€0B
€25B 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

€20B

€15B Although both regions saw new-issue yields widen this year,
the gap between single-B European supply and the comparable
€10B
U.S. paper grew to 74 bps in the first quarter, from 42 bps
€5B in the fourth quarter of 2015. This made it unappealing for
a European borrower, especially in the single-B bracket, to
€0B
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 pay up to meet the yield expectations of the U.S. market, if it
could raise the financing at home instead.

6
LCD European Quarterly First quarter 2016

Chart 17: YTM at issue for TLBs rated B (rolling 3 months) deal flow is probably a good thing until the strength of
7.0% the CLO market is better known, and arrangers are more
Europe U.S. confident of finding demand at a given price point. “Unless
6.5% the market is flooded with new loans, I feel pretty good
about investor appetite,” says an arranger. “I hope we’ll see
6.0%
a steady trickle that will be absorbed by the market.”
5.5%
Looking towards issuance for the coming months, there
5.0% would appear to be enough in the M&A pipeline to instil some
4.5%
optimism for a pick-up in the second quarter. Refinancings
and recaps will require a steady tone and probably a credible
4.0% drop in clearing yields for this option to be truly attractive,
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
but there are new buyouts in the works.

Chart 19: European forward pipeline volume

With cross-border borrowing on the decline, European €7B
covenant-lite volume dipped to €5.4 billion in the first €6B
quarter of 2016, down 5% year-on-year, and down 16%
from the fourth quarter. As a share of overall institutional €5B

supply, cov-lite paper has accounted for 50% so far in 2016 €4B
— slightly higher than this time last year, but down from
€3B
60% in the final three months of 2015.
€2B

Chart 18: European cov-lite loan volume €1B

€8B 80% €0B

Cov-lite TL Apr May Jun Jul Aug Sep Oct Oct Nov Dec Jan Feb Mar
2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2016 2016 2016
Share of total institutional volume
€6B 60%

€4B 40%
These include Novacap, with Eurazeo in exclusive
negotiations, and KKR’s purchase of Defence Electronics.

€2B
€0B
1Q12 1Q13 1Q14
Looking exclusively at domestic transactions, cov-lite
borrowing this quarter was well ahead year-on-year, at
€2.3 billion versus €1 billion, although it lagged the fourth
quarter of 2015, which posted €2.6 billion.
During recent months, a debate has surfaced regarding
the suitability of some smaller transactions for cov-
lite documentation, along with broader-based protests
about aggressively borrower-friendly terms. The highly
competitive nature of the European arranging bank scene
makes it easier for sponsors to push for cov-lite docs, but
some buysiders say they are unwilling to accept this format
on deals that are likely to be highly illiquid.
Pipeline pick-up
From the perspective of keeping supply and demand in
relatively even balance for the next few months, a modest
20% Elsewhere the sales of the spun-off assets of Rexam/Ball and
WMF are underway, potentially prompting new financing
0%
prospects in the second quarter, while the dual-track sale
1Q15 1Q16 of Philips’ lighting division is still in the works. U.S.
borrowers with euro-denominated cash flows will help prop
up issuance, sources add.
Disruption in the loan and high-yield bond markets may act
as a drag in terms of how quickly an auction moves ahead,
if underwriters are cautious about booking new risk in
tempestuous markets. However, the rise in the cost of tapping
the European loan market is not sufficient to cause sponsors
to pull back from pursuing a business they like, sources say.
From the issuer’s point of view and taking base rates into
account, the cost of raising capital via the loan market is
well within historical norms.
Focusing on euro-denominated institutional facilities raised
by sponsor-owned companies, LCD took the average
margin, plus either Euribor as of closing, or the Euribor floor
in cases where there was one (negative Euribor is treated as
zero, on the assumption of a 0% floor).

7
First quarter 2016 LCD European Quarterly

Chart 20: Sponsored cost of capital based on TLB tranche* Chart 21: Pro forma debt/EBITDA ratios
850 bps
6x
800 bps
5x
750 bps
700 bps 4x

650 bps 3x
600 bps
2x
550 bps
500 bps 1x

450 bps 0x
2004 2006 2008 2010 2012 2014 1Q16
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16
* Based on initial spread plus Euribor base rate or floor, if applicable First lien/EBITDA Second lien/EBITDA Other debt/EBITDA

While this method is far from perfect, it nonetheless serves
to put some context around the higher spreads seen in Europe
in the first quarter: even though spreads are relatively high,
interest rates have fallen to ultra-low levels, so borrowing
costs are still lower than they have been in the past.
A sponsor’s IRR is not so sensitive as to be made unworkable
by increases to financing costs of the magnitude seen so far
this year, sources say, adding that private equity firms have
plenty of dry powder and are keen to deploy it.
In terms of expectations around deal flow, there are other,
somewhat intangible, considerations. One of these is whether
the upcoming Brexit referendum will cause any hesitation
in M&A activity. Market players appear to be relatively
unconcerned, but that is perhaps because the majority seem
to be quietly assuming that Britain will stay in the EU,
rather than because they have done any deep analysis into
the possible outcomes.
In addition, the ECB has said it is considering publishing
guidelines for the leveraged loan market, to maintain
credit quality in leveraged loans, and to try to safeguard
underwriting standards. Exactly what these may look like
is yet to become clear, but the central bank does seem more
likely, rather than less likely, to issue guidance of some form.
First-lien bears leverage burden
Taking a look at leverage multiples — since this is one of
the cornerstones of the U.S. lending guidance — year-to-
date issuance shows total leverage essentially unchanged
versus full-year 2015, at just a shade inside 5x. But the early
months of the year do show a pick-up in first-lien leverage.
At 4.6x through March 31, this is the highest three-month
reading for this measure in eight years (note, the historical
high for first-lien leverage was seen in the three months
through September 2007, at 4.9x).
tranche, the fact is that across the market, more weight was
carried by first-lien lenders in the recent issuance.
Compared with 2007 and 2008, equity cheques on
sponsored deals are substantially higher. The average
equity contribution was 48% in the first quarter, compared
to full-year averages in the 42–43% range tracked in
2013–2015.
Chart 22: Avg. equity contribution to buyouts
60%
50%
40%
30%
20%
10%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16
Retained equity/Vendor financing Contributed equity
All this translates into a huge increase in purchase price
multiples, which have topped 10x on this year’s buyouts.
However, it’s too early — and deal flow has been too patchy
— to determine whether there is a robust trend here that will
be sustained throughout the year.
High-yield volume shrinks, but gets ECB boost
The first quarter was mostly a difficult one for high-yield as
primary volume collapsed, deals were postponed, secondary
prices fell, liquidity dried up, and outflows dominated.
That all changed in mid-March however, when the ECB
announced fresh stimulus measures and it suddenly felt as
if the market was back on its feet for the first time in 2016.

While second-lien facilities have been seen on a few Starting with the bad news then, it was the worst opening
financings this quarter, even on the occasional mezzanine quarter for primary volume since 2009, as just €7.1 billion

8
LCD European Quarterly First quarter 2016

of high-yield supply printed (€540 million priced back in
1Q09). This tally contrasts starkly with the record first-
quarter volume of €27.1 billion issued last year, while the
average 1Q volume between 2010 and 2015 was €17.7
billion.
able to price a new deal more cheaply off their secondary
curve. Making it even more difficult for bankers, prices were
dropping on a weekly basis and this lack of stability meant
they were unable to confidently pitch pricing to prospective
borrowers.

Chart 23: European high-yield bond issuance “Those first two months were very challenging,” says a
€30B 60 banker. “The volatility, and low prices generally, meant you
Volume Post-ECB Deal count
couldn’t make a refinancing work. It also got to the stage
€25B 50
where none of us were sure where a clearing level would be,
€20B 40 as the market could turn against you so quickly. At times like
this it is only those that have to issue that will — and there
€15B 30
weren’t really any of those.”
€10B 20
The only issuer that tried a refinancing (excluding taps) in the
€5B 10 first two months was Moby, and its experience highlighted
how difficult the market was. Despite robust credit metrics
€0B 0
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 and a double-B rating, uncertainty over the outcome of an
ongoing European Commission investigation regarding the
firm, allied with the tough conditions, forced the issuer to
pay through the nose to get the deal away.
Whereas players began last year on the front foot — with
the ECB announcing it would buy sovereign bonds as part Some claim pre-marketing was done at high-6%/low-7%
of its quantitative easing measures — 2016 kicked off with area, but the bonds still printed at 7.75%, which was 380
concerns over Chinese and global growth prospects as well bps higher than the 90-day rolling average new-issue yield
as a falling oil price, meaning risk assets across financial for double-B rated bonds at the time.
markets were buffeted.
With opportunistic deals so hard to do the only other reason
Chart 24: European bond flow composite to issue was for acquisition financing, but the market proved
350 bps 105 no more accommodating to those looking to take out
bridges. Worldwide Flight Services (WFS) was the only
250 bps 103 company to issue a non-tap for this purpose in the first two
months, and again it was forced to pay up.
150 bps 101
(March reading as of March 24)
The borrower printed its standalone unsecured bonds at
50 bps 99
a 13% yield — the highest-yielding deal in almost two
-50 bps 97
and a half years — and offered a 365 bps pick-up to its
accompanying secured paper (which was a tap). That was
-150 bps 95 the widest differential seen between newly issued secured
Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 and unsecured paper since the start of 2010.
Monthly change in avg. bid (bps) Avg. bid
Chart 25: European BB-rated primary yield (rolling three months)

5.0%
The risk-off sentiment that swept across markets caused Yields peak pre-ECB
liquidity to dry up in high-yield secondary, and this meant 4.77%
prices were marked down. LCD’s bond flow composite
shed 196 bps in the first two months of the year, taking the 4.5%

average price below par to 98.52, and dipped to 98.15 in the

third week of January — the lowest level for this measure
since August 2012. 4.0%

3.84%
Depressed secondary prices are a major drag on opportunistic 93 bps tighter post-announcement
transactions in primary, and so it proved in the first quarter. 3.5%
This is because borrowers wanting to refinance often need Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Mar-16
their outstanding bonds to be above par if they are to be

9
First quarter 2016
All this meant that new-issue yields rose during the first two
months, especially for double-Bs. Indeed, the three-month
rolling average new-issue yield for double-B rated bonds
rose from 4.23% at the end of December to 4.77% before
the ECB’s announcement in March.
On the shelf
Against this backdrop the market started to see deals being
postponed, and in mid-February LeasePlan shelved its
€1.55 billion cross-border offering as pricing ran away from
it by as much as 100 bps during marketing.
Conditions were tough for the company as the iTraxx
Crossover index blew out 100 bps during marketing to
nearly 490 — its widest print in almost three years — while
the market’s crosshairs moved to financials and the AT1
structure, which unfortunately for LeasePlan meant there
were concerns about its structure (it needs to upstream
dividends to finance the debt and is also subject to capital
ratio requirements).
A few weeks later, Solera nixed the euro bond portion of its
LBO financing. While it did get away euro and dollar loans,
and dollar bonds, it could not raise sufficient appetite for the
euro bonds at an attractive price for the borrower.
Elsewhere, banks that had provided bridge financing for the
LBO of TeamSystem last year were busy in the background
doing all they could to avoid running into the same problems.
They instead de-risked the bridge via privately-placed FRNs
with a handful of accounts. That the sponsor benefits from
much shorter call protection was another reason cited for the
change in plans.
Such developments meant that by the end of February two
consecutive deals had been pulled, while a third had
sidestepped the public markets entirely, and at that stage few
players could fathom how or when primary would get back
on its feet.
Phoenix from the flames
There were some green shoots during the weeks from late
February as inflows started to emerge in high-yield funds,
following a near-12-week run of outflows, according to J.P.
Morgan (one of these 12 weeks saw a €5 million inflow).
This change came as other asset classes performed even
worse than high-yield, and there was some recognition
that the market had been beaten up enough, and was now
offering value.
However the real game changer was the ECB’s meeting
in mid-March, when it announced a 20% increase in its
monthly bond purchase programme, that will now include
investment-grade corporate bonds. Following that event
conditions vastly improved — the Crossover tightened more
10
LCD European Quarterly
than 100 bps, and by March 24 LCD’s bond flow composite
was 324 bps higher than the last reading in February, while
issuance picked up as money poured into accounts. The
week after the ECB announcement, European high-yield
funds saw the third-largest weekly inflow on record, at €1.11
billion. Moreover, the new-issue yield for double-B rated
bonds tightened by 93 bps to 3.84% (through the end of
March), the tightest it has been since May 2015.
Chart 26: European high-yield fund flows (€M)
1,200
800
400
0
-400
-800
Dec 16 Dec 30 Jan 13 Jan 27 Feb 10 Feb 24 Mar 09 Mar 23
2015 2015 2016 2016 2016 2016 2016 2016
Source: J.P. Morgan High-Yield Research
Even before the cash started washing in, LeasePlan came
back to market. The borrower launched before the ECB
announcement and was whispering its bonds 25–50 bps
tighter than where it had pulled them. Demand ramped up
post-ECB, and the borrower subsequently accelerated its
deal, printing the euro bonds 62.5 bps tighter than when it
postponed.
For reference, the only other issuer in recent times to come
back with a tighter offering (having officially guided before
being shelved) was Unilabs in 2013, and that was just 25
bps tighter on the fixed-rate tranche.
With conditions much improved other issuers quickly
followed, leading to the single busiest week (beginning
March 14) of the quarter by deal count (excluding taps) —
though the fact that a deal count of three takes this title is
another sign of what a poor quarter it has been.
Still, both Sappi and Faurecia got double-B refinancings
away, doubling the number of refinancings seen in the
quarter, while Parex showed there is appetite for more
aggressive deals as it issued a dividend recap with portability
and a flexible covenant package for the issuer.
Looking ahead, high-yield players are hoping that the ECB
effect will be similar to what happened during the first
quarter of last year, in that accounts will be awash with cash,
and more issuers will look to come to market — and the
early signs are that this is happening.
— Ruth McGavin, Luke Millar
 S&P Global Market Intelligence LCD

LCD News – U.S. LCD News – Europe Darren Maharaj (44-20) 7176-7213
Leveraged loans/CLOs darren.maharaj@spcapitaliq.com
Leveraged loans/High-yield bonds
Chris Donnelly (212) 438-5094 Sarah Husband (44-20) 7176-3928 Yvonne Wang (212) 438-5837
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High-yield bonds
Matt Fuller (212) 438-2050 tim.cross@spcapitaliq.com Min Lu (212) 438-2718
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LCD Global Research
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High-grade bonds ruth.mcgavin@spcapitaliq.com Marc Auerbach (212) 438-2703
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