Leverage on European loans continues to tick higher, rising to 5.4x as of mid-November, the highest since the 6x in 2007, before the onset of the financial crisis, according to LCD.
And at 4.8x, leverage through the first-lien debt of a loan issuer’s capital structure is the highest it has ever been, while the surge in second-lien loan issuance this year adds another 0.35x of leverage, double that of last year.
This picture is broadly similar to that seen in the U.S., save for one key difference: There hasn’t been a mellowing in attitude towards the European Central Bank’s guidelines regarding leverage, as these were already deemed toothless by the European market. The knock-on effect from the less-stringent approach to the U.S. guidelines is likely to have had more of an impact, market sources say, though European bankers are far keener to say they remain conservative, if only due to self-regulation.
“The ECB is another item to discuss in [credit] committee,” explains a banker. “But if a credit is going to be declined, it’s usually way before we get to the ECB questions. We don’t need the ECB to tell us to consider cash flow valuations — that is just how leverage finance works. I’m not sure that our acceptance/decline rate has changed since the guidance.”
“We will always be careful as it’s our business,” notes a head of origination. “It’s part of our thought process but I think at the moment, market conditions will impact underwriting more. That said, there are some quite aggressive pitches out there, and it is the U.S. banks leading the pack.” – Luke Millar
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