Monthly European Loan Market Update - January 2020

Monthly insights and updates from the Invesco Fixed Income team.

The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned 0.75% in December, comprised of principal return of 0.39% and interest return of 0.36%.1 Year-to-date (“YTD”) returns are 5.03%.1

Markets ended the year in December with strong performance across most asset classes given positive news on the two large macroeconomic worries: US-China trade war and Brexit. President Trump announced that a “large and comprehensive” Phase 1 trade deal will be signed in January. The deal sees the US suspending a further $160 billion (bn) of tariffs on Chinese imports, with China agreeing to increase its purchases of agricultural products. While Phase 2 talks are yet to begin, this has temporarily calmed fears of a trade war escalation. The S&P 500 rallied 3.25% during the month of December.2

Elections in the UK delivered a clear majority for Prime Minister Boris Johnson and the Conservative Party, with the UK now set to leave the EU on January 31. The British Pound rallied to as high as 1.35 versus the US Dollar – its highest level since mid-2018 – but has since shed 2 points as the market is now focusing on the upcoming UK-EU trade negotiations during the year-long transition period in 2020. 

Such risk-on sentiment also supported the European loan market. In particular, riskier ‘CCC’ assets performed strongly with a 4.27% return during the month significantly ahead of returns for ‘B’ loans (+0.86%) and ‘BB’ loans (0.59%).1 On average, secondary prices advanced by 48 basis points (bps), as primary issuance slowed down considerably during the holiday period. There was only about €0.4bn of new loan primary issuance in December, which was below the €1.7bn during the same period in 2018. For the full year of 2019, primary volume closed in at €69.5bn, at 11% below 2018 levels.

Despite issuance being slightly weaker year-over-year, demand remains strong with the CLO market recording its fourth consecutive year of record annual volume. In 2019, new CLO supply stood at approximately €29.0bn from 70 deals (versus 2018 with €27.3bn from 66 deals). Against this backdrop, pricing has moved tighter, with rolling 3-month new issue yield for Term Loan B (TLB) facilities decreasing to 3.90% as of December, which is approximately 30bps lower compared to the start of the year.

As we move into 2020, the new issuance pipeline looks healthy with the S&P Leveraged Commentary & Data’s (LCD) forward loan calendar standing at €7.6bn from 11 deals. For the year 2020, we expect loan supply to kick-off strongly in Q1 and then follow 2019 trends totaling around €70bn. While the credit cycle is aging, default rates in Europe are still significantly below historic averages at 0.44%3 and only forecasted to increase modestly in 2020. 

The CS WELLI’s nominal value (size of the market) at the end of the month was €311bn, a 9% increase YTD.1

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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of Dec. 31, 2019.
^2 S&P 500 Index (CS WELLI) in USD as of Dec. 31, 2019. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
^3 S&P European Leveraged Loan Index as of Dec. 31, 2019.