The European Central Bank’s March announcement of a new Corporate Securities Purchase Programme (CSPP) — expected to take effect in June — will be a game changer for corporate bond market issuance in Europe over the next few months, including for private equity-owned firms and leveraged corporates, according to S&P.
In its quarterly leveraged finance report, titled The ECB’s Corporate Buying Program Will Boost European High Yield Bond Issuance In First-Half 2016, S&P says that before the announcement, debt capital markets activity in Europe had been moribund in 2016, and had completely dried up for speculative-grade borrowers.
Inflows into high-yield funds had already begun to improve in early March, and secondary pricing fell to a point where investors started to step back in. These factors helped some well-known and highly rated names to start wading back into primary high-yield, but the ECB’s actions are likely to give the market a real boost, adds the agency.
S&P expects the anticipation of the ECB’s program launch in June will have a beneficial impact on new bond issuance, as spreads will tighten across the credit curve. This will likely lead to an increase in refinancing and recapitalization activity, as well as greater debt-funded merger and acquisition financing for corporates and private equity, it adds.
The risk from a credit perspective is that this scenario could lead to more shareholder-friendly activities — something that S&P says it will continue to monitor closely and flag to the market.
The report, which was published today on RatingsDirect, also discusses how the leveraged loan market stayed open throughout the months that were difficult for public bond issuance. Most of the deal flow came from LBOs and particularly smaller transactions, according to S&P. The rating agency also notes that borrowers active in the market used deal structures that show a reversion to the typical pre-crisis structure for leveraged buyouts, of senior secured loan lending with an accompanying revolving credit facility.
S&P anticipates that the current public debt market conditions will remain volatile throughout the year, leading to stops and starts in deal flow volume as borrowers take advantage of windows of opportunity to issue. Markets will remain vulnerable to disruption from overall volatility, including from idiosyncratic political risk, such as the U.K. referendum on whether to leave the EU, and the U.S. elections, the agency adds. — Staff reports
The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to resea[email protected].