Technology, media and telecom companies in Europe are unsurprisingly taking out more debt this year than last, although investor returns from the sector's borrowing remain below the average, according to data from LCD, an offering of S&P Global Market Intelligence.
Almost a quarter of total leveraged loan issuance through September went to TMT companies, the data shows. This is in line with previous years, except 2019, which saw the sector make up only 11.4% of the total.
Over a fifth of bond issuance through September came from TMT companies, meanwhile.
Some of the more frequent issuers in the sector are highly leveraged telcos such as Altice Europe, Liberty Global PLC-owned Virgin Media, and Liberty's joint venture in the Netherlands, VodafoneZiggo.
Liberty Global companies have been a mainstay of the secondaries market for many years and have a reputation as highly savvy users of the leveraged finance debt markets.
Virgin Media bonds issued in September, for example, mature in 2029 and 2031. Proceeds from the entire £5.7 billion financing package — which also includes a loan — are earmarked for general corporate purposes, including distributions on closing its £31.4 billion joint venture with Telefonica's U.K. carrier O2.
VodafoneZiggo and Virgin Media had 4.46x and 4.77x net debt/EBITDA as of June 30, respectively, compared to 4.77x and 4.30x as of Dec. 31, 2019. Altice's net debt/EBITDA was 7.6x as of June 30, compared to 7.8x in full year 2019.
Although TMT issuers are accessing capital markets at higher levels than in 2019, they are paying lower yields on debt, the data shows.
The cost of TMT borrowing has come down alongside the wider market over the past five years, as central banks pour money into the system, pushing investors needing yield to move down the credit ratings ladder, which in turn pushes borrowing costs down in the leveraged finance space.
The average yield-to-maturity, or YTM, for TMT loans and double-B rated bonds is below the average for the market, although single-B bonds offer better returns.
The trend reflects the general stability of large TMT firms, with underlying business models that are viewed as less susceptible to economic cycles and market downturns, allowing them to raise more debt for less than the broader leveraged finance space. Reinforcing the view in recent months, contract-based telecoms is increasingly cited as a utility due to the crucial need for stable internet and mobile data connections as people work from home during shelter-in-place measures.
The loan market witnessed a similar five-year trajectory, but yields for the TMT sector and its single-B rated firms are slightly lower now at 3.90% and 3.78% compared to 4.10% and 4.26% for the total market. Similarly, single-B rated bond issuers in the TMT space priced their debt 62 basis points lower than the wider market over the period between 2015 to Sept. 2020.
For lenders, that implies that they are offering liquidity to the same companies at a lower interest rate than five years ago. But that may not act as a deterrent as large TMT firms that are cash-generative and asset-rich are still viewed as posing less risk than businesses in other sectors, largely due to their defensive merits.
Another sign of the sector's defensive qualities was reflected in TMT weighted average bid prices, which continued to trend above the broader S&P Leveraged Loan Index during the collapse caused by the pandemic. The weighted average bid price of TMT loans fell by less than the overall market and recovered more quickly.