Monthly European Loan Market Update - March 2020

Monthly European Loan Market Update - March 2020
Monthly insights and updates from the Invesco Fixed Income team.

The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned -1.03% in February, comprised of principal return of -1.35% and interest return of 0.31%.1 

Coronavirus (COVID-19) fears dominated global markets, particularly towards the end the month (the Index fell by -46 basis points (bps) on the last trading day of the month) as concerns of a global pandemic increased. More than 60 countries are now directly affected. During most of February – prior to the outbreak in Italy – the impact on Europe was largely contained to China-related export and supply-chain exposure. During the last week of the month, as the spread of the virus became more evident, a 10%-12.5% correction in European, US, and Japanese equities occurred. The Airline and Travel sectors were particularly weak.   

Chinese PMI data suggests a considerable economic impact, as the latest readings indicate a record quarterly decline in output in the first quarter. Positively, there are early signs that activity is starting to return towards more stable levels in places like Hong Kong, Singapore, and even parts of China where people are becoming more familiar with the virus. Given the containment measures initiated by the Chinese government, economists currently expect negative Chinese GDP growth in Q1 with a sharp rebound thereafter in Q2 or Q3.   

There is a high degree of uncertainty and the situation is in high flux, nevertheless a global slowdown is to be expected in the months ahead. Assessing the effects for 2020 global GDP growth and company earnings are at the forefront.  Expectations are for further US Federal Reserve cuts (a 50bps cut was announced on March 3) and monetary action by the ECB – who are ready to “take targeted actions” – including more asset purchases (QE) amongst other measures.  

February loan issuance was strong at €9.7 billion (bn), primarily occurring in the first half of the month. Increasing concerns around the impact of the coronavirus caused a halt to refinancing and recap activity. During the last week of February, three repricing transactions were cancelled and expectations for new primary supply over the coming weeks are muted, despite a generally healthy pipeline of M&A and LBOs.  

Demand from CLO investors remained strong during February. YTD CLO deal volume is €4.7bn from 11 deals (2019: €3.1bn from 7 deals). While pricing in the primary market for CLO liabilities edged tighter during the month – achieving a sub-90bps AAA print for the first time in 2020 – general market weakness spilled over to the CLO market during the last week of February. Going forward, primary CLO volume is expected to subside until markets stabilize from the coronavirus-induced volatility. 

The CS WELLI’s nominal value (size of the market) at the end of the month was €316 billion, a 1.5% increase YTD.1

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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of Feb. 29, 2020.