Demand for mezzanine paper remained high in the first half of 2005, according to a European leveraged finance special report by ratings agency Fitch.
In the first half of 2005, the agency rated E2.6bn of mezzanine debt, compared with E2.2bn in the first half of 2004 and E5.9bn in 2004.
For the first quarter of 2005, the agency continued to see strong mezzanine issuance, up 76% year-on-year alongside healthy activity in the European high yield bond market and a low level of second lien issuance. However, second lien overtook mezzanine in Q2 when it helped to refinance existing high yield bonds for Sanitec and Debenhams.
Mezzanine issuance continued to be dominated by refinancing activity. Recycled transactions (recapitalisations or secondary/ tertiary buyouts) accounted for 79% of newly rated mezzanine in the first half of 2005 compared to just 29% in the first half of 2004.
Fitch expects default rates to remain higher-than-average (2.1% since Q4 2001) in the medium term and remains concerned about potential recoveries for mezzanine lenders, particularly in transactions where equity has been removed and mezzanine has become further subordinated following second lien issuance.