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Riskier Borrowers Gobble Up Increasing Share of European Leveraged Loan Mart

Market pros see leveraged loan default rate holding at low levels

S&P: BBB downgrade risks in Europe look manageable

As specter of rate cuts grows, investors retreat from leveraged loan asset class

Retail investors flock to US high yield bond funds with $1.8B inflow


Riskier Borrowers Gobble Up Increasing Share of European Leveraged Loan Mart

b rated europe loans

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.

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