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European leveraged loan bids top pre-pandemic peak, boosted by latest gains

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European leveraged loan bids top pre-pandemic peak, boosted by latest gains

In February, the weighted average bid of the S&P European Leveraged Loan Index, or ELLI, finally climbed back above its pre-pandemic high of 98.66 set in January 2020, to end the month at 98.68. This was achieved thanks to a steady rise in European leveraged loan prices in the first two months of 2021, with the ELLI posting a 0.84% gain (excluding currency) in February, following a 0.89% advance in January.

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February's positive performance means the return over the last 12 months has increased to 4.68% — up from 3.02% in January and a full-year return of 2.74% at the end of 2020.

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Demand for loans has been unaffected by the recent widening in government bond yields as Europe's investor base is primarily CLO-driven, and this has resulted in more stable demand for the asset class when compared to high-yield bonds. Some credits in the travel and leisure sectors continue to suffer, however, as there is still uncertainty over easing pandemic-related restrictions, but new loan breaks continue to be well-supported.

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The strength of demand has also resulted in some sizable BWICs emerging, as well as single-name auctions, such as sales for Cognita and a €35 million block of French telco SFR, according to LCD news. As the loan pipeline for early March is not as full as many would like, this means more repricing and recap supply is expected, and traders have told LCD that accounts are therefore increasingly looking to the secondary markets for new ideas.

This dynamic is evident in the percentage of loan facilities priced at par and above reaching 30.64% at the end of February — up from 18.60% in January and 13.33% in December. At the end of September this share was just 0.42%, and in August it was 0.24% (the first time the measure had been above zero at month-end since March).

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Sub-90 club
Meanwhile, the share of names bid lower than 90 in the ELLI declined to 2.35% in February, from 4.21% in January and 6.62% in December. This situation stands in stark contrast to the market back on March 25, 2020, when 94.08% of credits were priced below 90. The share of credits bid lower than 98 also fell, to 13.38%, from 17.40% in January and 23.66% in December 2020. The share of constituents bid between 98 and par fell slightly, to 55.98% in February from 64.06% in January, as the share of facilities priced above par rose.

Looking at LCD's measure, advancers led decliners on 19 of the 20 trading days tracked in February, and on average each day they outnumbered decliners by 2.42:1.

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The ELLI distress ratio — the percentage of performing loans in the Index priced below 80 by par amount — continued to fall, dipping to 0.93% by the end of February, from 1.17% in January and 1.30% in December. This measure has now improved beyond its February 2020 level, when it stood at 1.33%.

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This strength in secondary prices meant the market-value component of the return — which measures the movement in secondary prices for the Index — fell slightly, to 0.55% in February from 0.57% in January (though both these readings are up from 0.21% in December). The interest component comprised 0.29% of the month's return.

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Continued positive market-value returns have finally tipped the last-12-months return back into the black at 0.72% in the latest reading, having recovered from the pandemic-related March 2020 sell-off. It's the first time this measure has been positive since January 2020, with a loss of 0.89% to the end of January 2021.

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Single-B driver
February's return was driven mainly by activity in the single-B asset class, which accounts for the bulk of European transactions (roughly three-quarters of the ELLI), returning 0.75% (excluding currency). The return from double-B assets was 0.44% in February.

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For the trailing 12 months, the trend is the same as single-B assets have made enough of a comeback in the secondary market to negate their sell-off in March 2020. Single-Bs outperformed double-Bs on this measure — at 3.77% versus 3.46%, respectively — for the first time since February 2020.

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LCD's analysis of overall loan market technicals shows that in the last three months, net new loan supply (new loan issues tracked by the ELLI, minus repayments) came in at €4.32 billion, while the measurable side of demand (CLO issuance) was €5.81 billion. This calculation leaves a supply shortage of roughly €1.5 billion. This measure doesn't take into account non-CLO demand for leveraged loans.

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Repayments in the Index rose to €7.35 billion in February as there were some large repayments from Refinitiv, LCD-Biogroup and Innovyn. This is the highest monthly repayment volume since February 2020, and brought the rolling-three month repayment amount to €10.22 billion, which is the highest this figure has been since March 2020.

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Asset-class performance
European loans outperformed both U.S. loans and high-yield bonds in February. The S&P/LSTA Leveraged Loan Index returned 0.59% in February, compared to the ELLI's 0.84%, while the ICE BofAML Euro High Yield Index gained 0.60%.

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Equities outperformed all the asset classes LCD tracks for this analysis, with a return of 1.18% for February.

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