Sub Investment Grade Market

EMEA benchmark bond spreads by rating category* As of March 8, 2021

EMEA benchmark bond spreads by rating category* Developments compared to January ’20 (index =1x)

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

Markets fully open as of Q3 ‘20, very active first Q1 ‘21

  • After reopening for BB credits in Q3 ‘20 and B credits in Q4 ‘20, strong demand and attractive yields saw strong activity in the leveraged loan and high yields markets developing after the x-mas break
  • With M&A still waking up from the freeze in 2020, ramping demand from building warehouses, and active bond funds outpacing supply, B yields recovered to near January ’20 levels (13% up and stable)
  • Risk appetite returned to pre COVID-19 levels with leverage creeping up and debt providers mostly ignoring the lingering and yet to resolve effects of the pandemic
  • However, markets remain bifurcated, favouring sectors with a clear outlook and shunning second lien and mezzanine tranches
  • As of early March ’21, risk appetite and yields were fully supportive of LBO’s as marginal yields for B- credits fell below equity yield hurdles for the first time since Q1 ‘20
  • Signalling a very active Q1 ’21 and Q2 ‘21, including the mid-market

Topics for 2021-2022

  • With strong high yield issuance over the past years, the European leveraged finance market is gearing up for a new wall of maturity, with over EUR 40bn notes maturing in 2022, increasing to EUR 70bn in 2024
  • Although still in its infancy, ESG linked margin grids are making their entrance in the leveraged finance space, gaining from the experience and practices developed in the investment grade space. Finding ways to speed up ESG target setting in fast paced LBO’s will be the main challenge for banks in 2021-2022

*Yield to worst spread over EUR 5y fixed to 6m floating swap, diversified portfolio of liquid benchmark Eurozone, Euro issued, fixed rate first lien notes. Source: Zanders Analysis