A raft of acquisition and buyout transactions helped to take the average total deal size across the European and U.S. high-yield bond and leveraged loan markets to a record high by the end of April. This dynamic also boosted cross-border financing activity, with borrowers from Europe and the U.S. taking advantage of deep liquidity on both sides of the Atlantic.
Volumes in all segments of the leveraged loan and high-yield markets are now running at or through their 2007 highs on both continents. Average deal sizes are also through the levels seen just before the global financial crisis, having reached €900 million across bonds and loans issued in both Europe and the U.S. by the end of April, LCD data shows. Moreover, this deal size increase has come from a larger number of big transactions rather than just a handful of super-jumbos, with the largest debt size so far counted in 2021 at $10.75 billion, compared with a global maximum of $27.7 billion in 2007. "Refinancing activity in loans has slowed a little but there have been plenty of large global acquisition deals to keep the market busy," said one banker.
Big-ticket borrowers are also adept at taking advantage of all pockets of liquidity, whether that is in bonds or loans, Europe or the U.S. Allied Universal Corp., for example, has tapped secured loan and bond debt in euros, dollars and sterling alongside unsecured dollar bonds to support its £3.8 billion acquisition of British security services group G4S.
Europe has looked attractive for U.S. borrowers for other reasons, too. "U.S. borrowers will only come to Europe if they have a need to cover earnings," one banker said. "But the euro market has been a little more attractive than dollars over the last few months, certainly in yield terms, even if margins have been fairly flat," he added.
In the first quarter of the year, LCD data showed average cross-border European margins running roughly 25 basis points wide of those in the U.S. at +376 and +350, respectively. On a yield basis, however, the situation is inverted at 3.69% and 4.08% for Europe and the U.S., respectively — thereby suggesting that investors in the U.S. have higher return thresholds, even when taking into account the effect of three-month dollar Libor, which stands at roughly 0.175%. "If you can buy dollars with no hedging costs then this is favorable at the moment, as you tend to get a better [original issue discount] and margin [including the floor benefit]," said one investor.
Among recent deals, both Birkenstock GmbH & Co. KG and Allied Universal's cross-border loans priced with identical margins across the tranches, though the dollar yield on both deals was supported by a 0.5% floor.
In response, accounts note that the U.S. had started to see some fatigue in reaction to the year's onslaught of primary leveraged loan issuance some six weeks before Europe. Investor sources say that back in March, U.S. accounts were already pushing back against repricings and other squeezed terms, even as the market continued to tighten in Europe. "There does appear to have been some pushback on European names in the U.S.," said one European banker. "This may be a factor of how busy that market has been over the first few months of the year," he added.
In April, for example, UPC Broadband Holding BV priced the reduced dollar portion of its cross-border refinancing at the wider end of talk at L+300 with a 0% floor offered at 99, while managing to print the increased euro portion at the tighter end of talk at E+300 with a 0% floor at 99.75. Belron SA, meanwhile, priced both portions of its cross-border recapitalization wide of talk, though the euros still came tighter than the dollars, at E+275 with a 0% floor offered at 99.75, versus L+275 with a 0.5% floor at 99.
That said, the European leveraged loan market also showed some signs of flagging in April, as it started to see more upward price flexes relative to downward moves, following a quarter during which downward pricing revisions had dominated. A slight slowdown in the pace of issuance over the past few weeks does seem to have brought some poise back to the market though, with secondary showing renewed strength after a fairly lackluster April. Even so, bankers admit that the overheated conditions of the first quarter have now cooled considerably. "Investors can afford to be selective, and from allocations of as little as 10% of orders during the first part of the year, accounts are now receiving 90% or even full allocations," said one banker.
But any weakness in Europe did not translate into meaningful price moves, and these favorable terms help to explain Europe's relative popularity this year. The sheer size of the U.S. market means it typically takes the lion's share of cross-border deals, although this year the split has been more balanced at roughly 51%/49% (U.S./Europe), from a total volume of $30.9 billion.
Sources further note that U.S. borrowers have been more willing to widen their funding net away from their home market, with some speculating that the shock from the pandemic may have highlighted the benefit of tapping a broader investor group. "COVID-19 showed how important it is to have access to liquidity, and extending lender groups to better-match revenues certainly makes sense now," said one banker, who nevertheless underlined that the European market is only really useful for those U.S. borrowers with earnings in European currencies.
The large size of the U.S. market also means it will always be a pull for European leveraged finance borrowers. The depth of the dollar high-yield market for example is particularly attractive — especially when the benefit of swaps is taken into consideration, bankers say. "It makes a lot of sense for Europeans to borrow in dollars at the moment and swap back into European currencies, and we have certainly seen that happen on some big deals lately," one banker said.
Altice France SA, for example, wrapped a jumbo cross-border deal last month split between eight-year secured tranches of €400 million and $2.5 billion, priced at 4% and 5.125%, respectively. The deal was used to partially repay the borrower's existing notes, with banking sources noting that a good deal of the larger tranche was swapped back into European currencies.
But whatever the reason for reaching across the pond, with private equity players showing continued appetite for large global M&A transactions, there should be plenty of cross-border leveraged finance issuance running into the summer. Just this week, Apollo agreed to pay $5 billion to carve out Verizon Media from the telecom giant in a deal that will bring global brands including Yahoo under the private equity firm's wing.