Leveraged loans make slow recovery

Europe’s leveraged loan market witnessed a slow-down in the third quarter of 2001 with many deals put on hold, according to a report by international rating agency Fitch, entitled All doom and gloom or a temporary hiatus? But in spite of this, it looks like deal flow is gaining pace.

The slowdown in Q3 2001 reflected a deteriorating economic and business environment that was exacerbated by the events of September 11. The number of new deals reduced significantly and those that remained live have seen gestation periods extended. According to Fitch, the resulting slowdown in primary issuance means a statistical analysis of market trends for the period would not be a meaningful exercise at this stage and the Fitch report highlights a number of general, rather than statistical, trends.

Increasing trends included investors looking to source assets by investing in existing deals at depressed prices in the secondary market in order to find a home for liquidity. Syndication also slowed dramatically with many arrangers left holding underwritten positions as investors became more risk-averse and waited for some certainty to return to the market.

However, deals are being done, says Tony Stringer at Fitch. “The deal pipeline has started to pick up and there have been a few high profile deals that have arrived such as Cognis that have been a boost for the market.”

Something that has helped, he says, is that a lot of funds, particularly CDO funds, are needing to place their liquidity and almost any deal that is being brought to market with a reasonable structure will attract interest.

But while there are funds who want to invest, the banks are reluctant to lend. “Hopefully in the New Year when sentiment improves and when they’re in a better position to syndicate deals, it should free up more liquidity at the senior end,” said Stringer.

“I think what we are seeing is a kind of virtuous circle of hope and expectation it is in a lot of people’s interest to try and talk the market up. Looking at the fundamentals, things will continue to be difficult, but on a more positive note, deals that come to market will be more conservatively structured and offer better value to investors.”