Markets Update: European Leveraged Capital Markets

Episode Summary

Executive Summary: Goldman Sachs’ EMEA leverage finance leaders describe European high-yield and leveraged credit markets as cautiously optimistic, supported by abundant liquidity, massive fiscal and central bank intervention, resilient corporate actions, and limited new supply. They see broad-based recovery across Europe, modest nuances versus the US, and a continuing push toward more transparent ESG disclosure.

Main Topics: Sentiment in European non-investment grade credit (Priority: 5/5): Market tone is described as cautiously optimistic, with support coming from central-bank liquidity, fiscal stimulus, corporate cost-cutting, and a manageable supply backdrop. Broad-based recovery across European markets (Priority: 5/5): The speakers emphasize that credit conditions are constructive across Europe, with little differentiation between euro and sterling markets and limited country-specific risk premium relevance. UK market and Brexit considerations (Priority: 4/5): Sterling credit markets are functioning well despite Brexit uncertainty; spreads are somewhat wider than euros, but more due to market structure and liquidity than a clear Brexit premium. Europe versus the US credit backdrop (Priority: 4/5): Both regions have recovered strongly, but nuances exist by rating tier: Europe is relatively stronger in BB, while the US is stronger in single-B. Activity is more aggressive in the US. Liquidity, fiscal support, and supply dynamics (Priority: 5/5): Central bank action, government guarantees, and a limited forward pipeline are helping sustain favorable conditions and keep distressed outcomes contained. ESG demand and disclosure evolution (Priority: 4/5): ESG remains a major market focus, driven by regulation and investor demand for better issuer disclosure, with industry groups rolling out questionnaires and diligence tools.

Key Arguments: Investor sentiment in European leveraged credit is cautiously optimistic because central banks and governments stabilized markets and reduced systemic stress. Fiscal support and guarantee schemes have helped prevent more restructurings and distressed situations by underpinning labor markets and balance sheets. Companies reacted quickly by cutting costs, reorganizing, and improving efficiency, which should leave them better positioned for the recovery. The market entered the crisis with relatively limited underwritten inventory, and that supply has largely been placed, leaving a favorable technical backdrop. European credit recovery is broad-based, with investors focusing more on company fundamentals and COVID impact than on country of domicile. There is no large observable Brexit risk premium in sterling credit; sterling is somewhat wider mainly because the market is smaller and less liquid. Relative value between Europe and the US varies by rating bucket: Europe is tighter in BB, while the US is tighter in single-B. US leveraged finance shows earlier signs of more aggressive sponsor activity, including dividend recapitalizations, while Europe remains more muted. ESG is becoming more embedded in credit decisions, and the market is moving toward standardized disclosure through questionnaires and due diligence lists.

Data Points: Conference attendance: about 1,500 clients - Virtual EMEA Lev Fin Conference held on Tuesday Virgin Media transaction size: £5.7 billion - Example of a large multi-currency leveraged transaction in the sterling market Virgin Media sterling spread premium: 25 to 37.5 basis points wider - Sterling spreads versus euro spreads in the Virgin Media deal BUN-BTP spread differential: about 150 basis points - Illustration of remaining but declining peripheral-core sovereign spread gap in Europe BUN-BTP trend: coming down during the year - Shows reduced country-risk focus versus earlier in the crisis Double-B European new issue buyer mix: about 70% investment-grade buyers - Used to explain strong demand and ECB-driven crowding into better-quality credit CentreParcs coupon: 6.5% - Example of a COVID-impacted issuer accessing the sterling market Podcast date: Friday, September 11, 2020 - Recording date noted at the end of the episode

Pivotal Quotes: "cautiously optimistic" — Dominic Ashcroft: Description of current investor sentiment in European non-investment grade credit markets "both markets are strong and both markets are attractive to issuers" — Luke Gillen: Assessment of sterling and euro credit market conditions "ESG is not something that's going away" — Dominic Ashcroft: Explanation of the persistence and growing importance of ESG in credit markets

Implications: Credit markets appear technically strong into year-end, but issuance, ratings mix, and ESG disclosure will shape relative value. Investors should expect continued support, selective opportunities, and more transparency demands from issuers.