European Debt Markets Update

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Ronald James
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1 European Debt Markets Update Debt & Capital Advisory Click here to launch our interactive PDF

2 Weighted ave YTM itraxx crossover (spread bps) Primary volume bond update Loans update UK sponsored mid bond update Weak HY primary activity in September 14B 12B 10B 8B 6B 4B 2B 0B Recent high yield issues Deal Date Description Detail Rating Yield Comment Interoute 25/09/15 Acquisition 350m (Snr sec.) 250m (FRN) B+ B+ 7.38% E yr, non-call 2 5 yr, non-call 1 Arrow Global 23/09/15 Refinancing 110m (FRN) BB- E yr, non-call 2 Akelius Residential 16/09/15 Refinancing 300m (Snr) BB+ 3.42% 5 yr, non-call life Lindorff Group 03/09/15 Refinancing 200m (FRN) 30m (Snr sec.) Medical Properties Trust BB- E % 5 yr, non-call 1 6 yr, non-call 2 12/08/15 Acquisition 500m (Snr) BBB- 4.00% 7 yr, non-call life BUT Group 05/08/15 Corp. Purposes 66m (Snr) B 6.67% 4 yr, non-call 2 Cognita 31/07/15 Refinancing 280m (Snr sec.) B 7.49% 6 yr, non-call 2 House of Fraser 28/07/15 Refinancing 175m (FRN) B L yr, non-call 1 Secondary yields continue to increase 20.0% 2, % 1, % 1, % 1, % 1, % % % % - BAML BB BAML B BAML CCC and below itraxx Crossover (rhs) * The crossover index measures the CDS spread on an index of European high yield issuers Source: Thomson Reuters EIKON The high yield has suffered from successive bouts of volatility in the last few months, with causes ranging from the Greek debt crisis to growth fears in China Consequently, gauging sentiment has been difficult for issuers, and is a driving factor in September s weak primary volume of only 1.2bn across 4 deals. YTD High Yield issuance now stands at 56.1bn, well behind the 67.1bn of issuance over the same period in 2014 Weak secondary performance also seems to be weighing on investor risk appetite. Outflows from European HY funds totalled c. 1.2bn in the last 3 months, contrasting dramatically with the record inflows in Q1 earlier in the year. In addition, the spread on the itraxx Crossover index has widened approximately 100bps to 370bps since the end of July October has seen conditions start to improve following the increased likelihood that US interest rate rises will be further delayed following weak economic indicators PwC 2

3 Average leverage Ave. TLB spread / Yield (%) Primary volume bond update Loans update UK sponsored mid Loans update Subdued primary activity in September Recent leveraged loan transactions 10B 8B 6B 4B Deal Date Description Detail Price Rating Leverage YTM Galileo Education 30/09/15 Acquisition 230m TLB E+475 B 4.9x 5.0% VWR Scientific 25/09/15 General Purposes 460.5m TLB E+325 BB 4.7x 4.2% TriStyle Mode 19/08/15 LBO 125m TLA n/a n/a n/a n/a Cote Restaurants 11/08/15 LBO 108m TLB L+475 n/a 4.5x 5.5% 2B Amaya Gaming 07/08/15 Refinancing $325m TLB 92m TLB L+400 E+425 BB BB n/a n/a 5.2% 5.4% 0B Motor Fuel Group 07/08/15 LBO 300m TLB L+500 B 5.3x 6.3% AMCo Andipharm 06/08/15 Acquisition 603m TLB E+450 B+ n/a 4.7% Amedes 04/08/15 LBO 425m TLB E+475 n/a 4.8x 5.2% Institutional Pro Rata, Debtwire Primary spreads continue to increase 6.0x 6.0% 5.5x 5.0% 5.0x 4.0% 4.5x 4.0x 3.0% 3.5x 2.0% 3.0x 1.0% Ave. Debt/EBTIDA (lhs) Ave TLB spread (rhs) Ave TLB yield (rhs) The wider backdrop to the leveraged looks somewhat less supportive than before the summer break. Macroeconomic concerns over China /Emerging Markets and volatility in secondary s are two notable threats to investor confidence, though this is balanced by continued support from the ECB Primary activity was subdued in September as 11 deals were completed, raising only 3.9bn. This was the lowest monthly total since February this year (excluding August) and c. 2bn less than September 2014 M&A related activity accounted for the majority of September s deals, as a less issuer friendly (particularly rising spreads) has contributed to a drop off in opportunistic refinancing / recapitalisation deals from earlier in the year There was only a single CLO deal in September (the first since July) as issuers contend with limited new issuance and spreads on senior debt. YTD issuance now stands at 10.1bn from 25 deals. The forward CLO pipeline contains a number of deals that could price in the short term, which may encourage some issuers back to, PwC 3 although current AAA pricing is not conducive to new CLO issuance

4 UK Mid- volume ( m) 3m. trailing leverage bond update Loans update UK sponsored mid UK sponsored mid- UK mid- tracker Recent leveraged loan transactions 1,400 1,200 1, x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x Deal Date Description Detail Comment Currencies Direct Sep -15 Acquisition Innovation Group Sep -15 Acquisition 200m EV 70m unitranche 500m EV 230m TLB LBO (Corsair Capital / Palamon) LBO (Carlyle) Pacific Direct Sep -15 Acquisition 45m EV LBO (Ardian) Ideal Shopping Direct Sep -15 Acquisition 200m EV LBO (Blackstone) Elitech Sep -15 Refinancing 80m Snr debt Refinancing (Ergon Capital) Deal Volume 3M trailing average leverage Source: Various, PwC analysis (tracking deals up to 300m debt funding in the sponsored ), Debtwire UK mid- trends Deal volumes recovered in September following the Summer break Average leverage multiples continue to hold steady around the 4.5x level. We believe that this level is unlikely to fall substantially in the medium term due to the amount of dry powder that lenders are looking to deploy Alternative non-bank lenders are continuing to take share from traditional bank lenders with flexibility around commercial terms and ability to react swiftly are the key differentiators for sponsors The frothy debt s continue to drive high valuations for businesses, leading to some commentators to raise concerns as to where the may be heading Lender activity Toscafund has launched a 110m SME debt fund, joining Muzinich in opening a Manchester office. This further illustrates the continued push by alternative lenders to seek new opportunities outside the crowded London Private equity house Terra Firma has launched a new 1bn debt fund, targeting a range of debt funding opportunities Cerera Debt, a French based mid debt fund recently opened for business. The fund will be looking at food and agriculture related opportunities in Western Europe PwC 4

5 $ bn bond update Loans update UK sponsored mid Primary issuance remains subdued Proportion of loans funding growth plans continues to fall % % 60% % 20% 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % AA A BBB Growth General Refinance Recent deals Borrower Industry Nationality Value ($ m) Facility Margin Rating Use Rheinmetall Machinery Germany yr Euro RCF N/A BBB- Refinancing Whitbread Leisure UK 1,441 5 yr Euro RCF N/A BBB Refinancing Next plc Retail UK yr GBP RCF N/A BBB Refinancing Next plc Retail UK yr GBP RCF N/A BBB Refinancing Criteo SA IT France yr Euro RCF E + 85 bps N/A Future Acquisitions SHV Holdings NV Oil & Gas Netherlands yr Euro RCF E + 40 bps N/A GCP EDF Utility & Belgium 1,115 5 yr Euro RCF E + 35 bps N/A GCP Energy Clifford Chance Professional UK yr GBP RCF N/A N/A Refinancing Services JD Sports Fashion plc Retail UK yr GBP RCF N/A N/A Refinancing Shepherd Neame Ltd Leisure UK 31 5 yr GBP RCF N/A N/A Refinancing September was characterised by continued uncertainty fuelled by doubts over Chinese & emerging growth expectations, an increase in geo-political risks and the timing of US interest rate rises In reaction to this uncertainty, borrowers are increasingly putting growth plans on pause and this is reflected in a sustained and dramatic fall in the volume of loans funding growth plans (September: $614m LTM ave: $10,656m) This has contributed to an overall fall in the volume of European corporate IG loans issued, which has now fallen for the third month in a row, leaving 2015 YTD issuance 38% down on the same period last year Notwithstanding the bearish mood music, debt s remain borrower-friendly with strong liquidity from a diverse range of institutions and ultra-low cost of borrowing PwC 5

6 billions Launch Yield to Maturity (%) bond update Loans update UK sponsored mid Primary issuance volume has fallen in 2015 Yields continue to creep upward in September Q Q Q Q Q Q Q Q AA A BBB Recent deals Source: Dealogic AA A BBB BB Issuer Industry Nationality Instrument Value ( m) Metropolitan Housing Trust Source: Dealogic,, PwC Analysis Professional Services YTM (%) Coupon Launch rating UK 33 yr GBP Sr Secd AA- Abertis Infraestructuras Construction Spain 9 yr EUR Sr Unsecd BBB- Stagecoach Group Transportation UK 10 yr GBP Notes BBB AP Moller Maersk Transportation Denmark 10 yr USD Sr Unsecd BBB+ AP Moller Maersk Transportation Denmark 5 yr USD Sr Unsecd BBB+ Grand City Properties Real Estate Germany 10 yr EUR Sr Unsecd BBB (SAGESS) Oil & Gas France 12 yr EUR Sr Unsecd AA Koninklijke DSM Chemicals Holland 7 yr EUR Sr Unsecd A- Sanofi Healthcare France 6 yr EUR Sr Unsecd AA- Sanofi Healthcare France 10 yr EUR Sr Unsecd AA- ITV Telecoms UK 7 yr EUR Notes BBB- DS Smith Forestry UK 7 yr EUR Sr Unsecd BBB- Primary issuance initially picked up in September, but the cooled towards the end of the month due to growing concern for the macroeconomic outlook and the timing of the expected increase in US interest rates September volume was also helped by the resurgence of reverse-yankee deals as Apple issued a 2bn 12 year bond on 10 September Yields and margins continued to creep upward in September on the back of strong supply and investors demanding higher margins in response to growing concern for the global recovery Whilst commentary has focussed on bearish signals, the European IG corporate bond remains liquid and still offers attractive pricing. This was demonstrated by the 3.5bn bonds issued by Shell offering a launch YTM of 1.3%/1.9%, the largest IG corporate issuance since the Coca Cola deal in February PwC 6

7 Contact John Williams Partner, Debt & Capital Advisory Tel: +44 (0) David Godbee Partner, Debt & Capital Advisory Tel: +44 (0) PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details AH-UK

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