- The pace of European speculative-grade loan and bond issuance slowed to €30 billion in the third quarter of 2023, mainly driven by refinancing activity, amend-and-extend transactions, and a trickle of bolt-on merger and acquisition (M&A) financings.
- The average expected recovery rate for all European rated first-lien secured debt remains stable at 59%.
- 'B-' rated senior secured debt increased by 40% over the past 12 months. More than half of this increase was due to single-notch downgrades in the telecoms, building materials, and health care services sectors, offset by a handful of upgrades from 'CCC+' in the media and leisure sectors.
- The expected recovery rate on new issuance has risen marginally in the last two quarters, to 60%, driven by asset-rich issuers, often with subordinated debt tranches supporting the recovery prospects.
The second and third quarters of 2023 saw a steady stream of loan and bond transactions thanks to stable rates and spreads against a backdrop of robust new collateralized loan obligation issuance. In the same period, term loan volumes outpaced bond volumes by more than 2.5 to 1.0 by amount issued. This was a reversal from the first quarter of the year, when bond issuance dominated refinancing activity, particularly among companies with strong 'BB' category ratings.
Amendments and extensions of 2024 and 2025 loan maturities took center stage, with over €32 billion extended in the year to date, and by an average of three years. This addresses more than two-thirds of the outstanding loans in those years. Issuers typically refinanced debt tranches by tapping the same debt markets. Polynt, Boels Topholding B.V., and Coty Inc. were notable exceptions in the 'BB' rating category, replacing their term-loan borrowings with high-yield bonds.
Buyouts and other M&A activity accounted for approximately €9 billion of loan and bond issuance in the second and third quarters of 2023, with a broadly equal split between loans and bonds, according to Pitchbook's Leveraged Commentary & Data. Underwriting capacity and willingness appears more robust as we approach year-end.
Volatility in benchmarks and risk premiums during October, with the possibility of further rate increases on the horizon, likely delayed any meaningful M&A and leveraged buyout volume issuance to 2024. Private credit activity continues to fill the void for sponsors seeking to fund transactions in the absence of underwriting in the broadly syndicated market. Certainty of funding and speed of execution continue to trump conventional bank-backed underwriting with its fully flexed, lender-favorable pricing, ticking fees, and a longer time to market.
The average expected recovery rate for newly rated first-lien debt was stable in the second quarter of 2023, at 59%, increasing to 61% in the third quarter. The third-quarter increase largely reflected a small sample size (45 tranches in total), comprising multiple pari passu tranches issued by only 25 issuers (see chart 1).
New First-Lien Speculative-Grade Issuance
About 60% of all senior secured tranches issued in the second and third quarters of 2023 had expected recoveries of 60% or 65%
This amounts to €18 billion equivalent in debt, spread across 32 tranches, with media, entertainment, leisure, and retail issuers contributing over one-third of the total.
In the third quarter, more than half of the 29 tranches issued--or approximately €12 billion equivalent--had recovery prospects of 60% or 65%. Media, entertainment, leisure, and retail issuers raised over 75% of the debt in this recovery rate bracket.
The largest contributor was EG Group Ltd.'s amend-and-extend transaction, with 12 senior secured tranches, because it addressed the equivalent of over €5.6 billion of debt in multiple currencies with two- to three-year extensions. The group's significant asset base in the U.K. and other jurisdictions, as well as the presence of subordinated tranches maturing in the next two years, supported the recovery prospects.
The amount of new debt with expected recovery prospects of 50% or lower was negligible, with seven tranches, the equivalent of €4.6 billion. This was followed by debt with expected recovery prospects of 55%, equivalent to €3 billion across seven tranches.
Euro-denominated debt comprised 68% of total rated new first-lien issuance in the third quarter of 2023
U.S. dollar-denominated debt at European issuers amounted to €6 billion equivalent, or 27% of total new issuance in the third quarter. The challenging environment in the U.K. continues, with less than €1 billion of debt issuance in the quarter.
Rated first-lien new issuance, by rating category and type of debt
September 2023 average estimated recovery
|Loans (excl. RCF)||Senior secured notes||All issuance|
|'B' category rated tranches||62%||59%||61%|
|'BB' category rated tranches||67%||68%||68%|
|RCF--Revolving credit facility. Source: S&P Global Ratings.|
Analysis Of Total Outstanding European First-Lien Speculative-Grade Debt
The average recovery rate on all rated senior secured debt issued by European obligors remains stable at 59%
As of Sept. 30, 2023, we rate €854 billion equivalent of speculative-grade debt from 657 unique European obligors. Of this total, approximately €635 billion equivalent was senior secured debt, comprising loans, bonds, and committed revolving credit facilities, from 567 first-lien senior secured debt obligors. The average recovery estimate for all rated first-lien senior secured facilities (loans and bonds) remained broadly unchanged at 59% over the quarter (see chart 2).
Our recovery estimate remains much lower on average than the actual average first-lien recovery rate of 72.8% over 2003-2022 (see "European Corporate Recoveries 2003-2022: Recoveries Stable Despite Few Defaults," published July 5, 2023, on RatingsDirect).
Telecommunications issuers contributed the most to European speculative-grade senior secured debt by amount outstanding
Health care and business and consumer services follow. Health care, consumer products, and business and consumer services remained the most prominent in the 50% and 55% recovery bucket in the third quarter, with €101 billion of first-lien debt rated.
Telecoms, chemicals, restaurants and retail, and media, entertainment, and leisure contributed the most to debt, with expected recovery prospects of 60% or 65% across €216 billion of rated first-lien debt (see chart 3). Six telecoms companies account for approximately €106 billion equivalent of rated secured debt in this recovery range, with the largest being Altice France S.A., Altice International S.a.r.l., Ziggo B.V., Virgin Media Inc., and UPC Holding B.V.
A recovery rating of '3' remains the most common recovery rating for first-lien speculative-grade debt in Europe
The '3' recovery rating indicates our expectation of 50%-70% recovery prospects and applies to 85% of total rated debt by amount and number of tranches. At the recovery rating of '3', expected rounded recovery estimates of 50% or 55% account for 37% of the total rated senior secured debt by amount (or €204 billion equivalent), and 41% by number of tranches (384). Expected rounded recovery prospects of 60% or 65% constitute 63% of the total rated senior secured debt by amount (or €350 billion equivalent), and 59% by number of tranches (see chart 4).
The credit quality of first-lien secured debt has deteriorated to the 'B' category since the first quarter of 2023
This follows downgrades of about €30 billion of debt to 'B-' or lower. The largest contributors to the outstanding amount were Altice France, HomeVi, and LSF10 XL Bidco SCA.
The downgrade and default of Casino Guichard - Perrachon S.A., Adler Group S.A., Colouroz investment 2 LLC, Covis Finco S.a.r.l., and CatLuxe S.a.r.l. led the significant decrease in the 'CCC' category (see chart 5).
However, the 'BB' category saw an increase in debt driven by new issuance--primarily by Peer Holding III B.V., Allwyn Entertainment Financing (UK) PLC, and Ineos Group Holdings S.A. and its subsidiaries.
'B-' rated senior secured debt increased by 40% over the past 12 months. More than half of this increase was due to single-notch downgrades in the telecoms, building materials, and health care services sectors such as Altice France, LSF10 XL Bidco SCA (Xella), HomeVi and Herens Midco S.a.r.l. (Arxada). A handful of upgrades and new ratings also increased the balance, including HNVR Holdco Ltd. (B&B Hotels) and Cuppa Bidco B.V. (Ekaterra).
Rated European first-lien debt recovery, by rating category and type of debt
As of Sept. 30, 2023, by value and average estimated recovery
|'CCC+' or below rated tranches*||'B' category rated tranches||'BB' category rated tranches|
|Amount outstanding (bil. €)||Average recovery (%)||Amount outstanding (bil. €)||Average recovery (%)||Amount outstanding (bil. €)||Average recovery (%)|
|Loans (excl. RCF)||8||51%||315||58%||98||63%|
|*Excluding 'CC' and 'D'/'SD' ratings. RCF--Revolving credit facility. Source: S&P Global Ratings.|
Using average euro exchange rates for the third quarter of 2023, the amount of U.S. dollar-denominated debt tranches in the 'B' category declined by currency, driven by Altice France and Altice International. However, the 'BB-' rated U.S. dollar debt increased following upgrades from the 'B+' category led by Viasat Inc. (Connect Finco S.a.r.l.) and Froneri International Ltd. (see charts 6 and 7).
This report does not constitute a rating action.
|Primary Credit Analyst:||Marta Stojanova, London + 44 20 7176 0476;|
|Secondary Contact:||David W Gillmor, London + 44 20 7176 3673;|
|Research Contributor:||Maulik Shah, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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