Leveraged finance bond and loan issuance volumes will remain robust in 2019 but fail to match 2018 levels, with demand expected to continue outstripping supply, according to a leading rating agency.
In a note to clients earlier this month, Moody’s said mergers and acquisitions will dictate the supply of leveraged loans and high yield bonds in 2019.
Lucia Lopez, Senior Analyst at Moody's, said: “Market fundamentals look set to encourage merger activity, particularly via corporate carve-outs or private equity sponsors prepared to pay full valuations for assets."
Investor risk appetite will remain sound but pockets of volatility can be expected if trade tensions intensify or political friction increases in the euro area, she added.
Central banks' regulatory initiatives are expected to have limited impact on leveraged finance issuance. Most companies should be able to manage through interest rate hikes as they have taken advantage of low interest rates to extend debt maturities and have steadily increased their proportion of fixed-rate borrowing, Moody’s added.
Contractual protections for investors or capital structures are unlikely to improve because of expected supply-demand dynamics. If supply of M&A deals tightens during 2019, sponsors could push for US-style carve-outs on the more attractive deals, weakening protections further.
Credit selection is expected to become key for investors, as they prepare for a potential turn of the cycle and become wary of more challenging credit stories.
The European speculative-grade corporates default rate will stay around 2% in 2019 and liquidity will remain strong, according to Moody's proprietary indicators, but rating actions in 2018 in the speculative-grade universe have been biased towards the negative, as the agency sees early indications that global growth has peaked.
