The Credit Suisse Western European Leveraged Loan Index (“CS WELLI” or “Index”) returned 3.28% in May, comprised of principal return of 2.93% and interest return of 0.35%.1
While COVID-19 concerns remain at the forefront, signs of stabilization became evident throughout the month with infection curves generally flattening and helping governments begin a phased reopening of economies.
Sentiment has improved dramatically in recent months. For example, the Eurozone economic sentiment recovered from an eight-year low of -55 in March to +46 in May.2 Germany’s sentiment reached a five-year high. The pace of recovery and ranges of economic impact on the global economy are still heavily debated and will depend on the speed of which restrictions are lifted, what impact prolonged social distancing will have on consumption and productivity, and how much more stimulus governments and central banks are willing to commit to. At present, expectations are for an accelerated pick-up in GDP growth in the second half of the year.
This optimism drove markets higher. European equity indices posted meaningful returns for the month and, likewise, in the European leveraged loan market (average), with secondary market prices advancing by €2.67 to €91.60 during May.1
Activity in the primary loan market (new issuance) picked up, with issuers seeking liquidity. Most notably, transactions from borrowers most directly affected by the COVID-19 lockdown measures, such as the parking garage operator, Apcoa, and leisure park manager, Parques Reunidos, were well received by the market. In the latter parts of the month, leveraged buyout related issuance returned (for the first time since 1Q). Two examples include Financiere CEP, a French mortgage and insurance brokerage, and equipment rental firm, Boels, which relaunched its debt syndication for the acquisition of its competitor, Cramo. Loan spreads (margin) and initial original issue discounts (OIDs) on the new debt were attractive. We expect activity to further pick up as banks aim to syndicate out their pre-COVID-19 underwritten loans as coronavirus concerns reduce.
European CLO new issue markets remained open, with four deals pricing in the month (characterized by smaller size, shorter investment periods, and higher equity contributions). CLO AAA spreads were in the 170 basis points (bps) area, approximately 80bps wider as compared to levels seen in early 2020. Thus, primary (total) liability costs remain elevated, leaving managers challenged to make arbitrage economics work. Secondary CLO debt tranches rallied significantly throughout the month, as loan prices rose, collateral coverage tests improved, and expectations for defaults and rating downgrades slowed significantly.
The CS WELLI’s nominal value (size of the market) at the end of the month was approximately €313 billion, a 0.7% increase YTD.1
The CS WELLI’s nominal value (size of the market) at the end of the month was approximately €318 billion, a 2.1% increase YTD.1
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^1 Credit Suisse Western European Leveraged Loan Index (CS WELLI) in EUR as of May 31, 2020.
^2 ZEW Indicator of Economic Sentiment in the Euro Area.