The European leveraged loan market has grown rapidly over the last year, aided by a surge in issuance from riskier, single-B credits, as the pricing differential between this debt and other, higher-rated loan issues hit post-crisis lows. Investors attribute this spread compression to fierce investor competition for floating-rate assets.
But the growth in lower-rated names may be setting the scene for a rise in triple-C credits – the lowest rung on the ratings ladder for active debt issuers – further down the line, sources say.
The single-B portion of outstandings, per the S&P European Leveraged Loan Index (ELLI), has grown by 37% since the pre-crisis halcyon days of 2007, and by 42% just in the last 12 months. In absolute terms, this growth far outstrips that of double-B issuance. Indeed, the measure for trailing 12-month net growth in outstandings in the ELLI has averaged €2.5 billion in double-Bs since the start of 2017, and €25 billion for single-Bs.
Over the last year, the single-B growth is €38.6 billion.
This slant toward lower-rated debt matches movement seen in the investment grade market, where BBB level debt increasingly is taking a larger share of the market. This migration in credit quality alarms more than a few market watchers, as the current credit cycle – which has featured ever-looser loan structures – creaks along in its tenth year.
LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.