Sub Investment Grade Market

EMEA benchmark bond spreads by rating category As of November 2, 2021

Movement in EMEA benchmark yields by rating category 23 August 2021 to 2 November 2021

Sub Investment Grade Market - Market observation per 8 November 2021 -

Macro concerns drive yields

  • After the summer break, leveraged finance spreads increased from a 375-400 bps area in August ’21 to a 425-450 bps area in November ’21 (B+/B rated credits), marking a clear break in the post pandemic recovery earlier in the year
  • Eurozone B rated benchmark yields rose 75 bps since August ‘21, with credit spreads increasing 45 bps as markets absorbed historic new issue volumes and macro economic concerns became more prevalent after the summer
  • Starting in October ‘21, rising yields tipped the balance of LBO economics in favour of B and B- rated credit structures, as the marginal spread of BB- and B+ rated structures rose sharply
  • With rising yields, it is to be expected that debt processes in the year end rush will be challenged to meet yield expectations set in the benign markets shortly after the summer break
  • Pushes for tighter documentation could be held at bay as institutional demand remains strong, with CLO creation reaching post-financial crisis highs and private debt offerings becoming ever more appealing for the upper end of the mid market

Debt creation increasingly geared towards M&A

  • The volume of repricing transactions and optimisation of the debt maturity profile by corporate issuers is expected to taper off as the yield environment is not expected to improve in the near future
  • Private equity’s substantial dry powder, corporate M&A, and attractive public takeover economics (including SPAC’s) will continue to drive activity

* Mature market yield to maturity of similarly rated, liquid, benchmark Eurozone fixed rate first ranking notes, minus the EURO mid swap rate applicable to the average payback period for the rating category. ** Marginal spread of raising one additional Euro of debt. Proxy for LBO economics where the marginal spread should not exceed private equity return (IRR) targets.