Top 10 Investor Questions For 2014: Global Leveraged Finance

Standard & Poor’s recently published a report that addresses the top 10 investor questions about global leveraged finance. In this CreditMatters TV segment, Director Steve Wilkinson discusses some of the key themes covered in the article.

Hello and welcome to credit matters tv i’m your host all of head on c and i’m here with steve wilkinson a director in the corporate rating seen steve you’re one of the authors of a recent piece we’ve just published on the top ten investor questions for leveraged finance i’m wondering if you can walk us through some of the key highlights of the piece sure one of

The key issues that really transcends a lot of the topics we cover in the article is that the leverage credit markets have been very active as investors are seeking yield in a low interest rate environment one of the outcomes of that which you’d expect is very strong issuance levels in 2013 the globalspec rate bond markets reached a record issuance of nearly 400

Billion dollars with roughly fifty five percent of that in the us looking at it geographically the us market the european market as well as the asia-pacific markets all reached record highs and the latin american markets and canadian markets both had very strong years although somewhat below the levels they achieved in twenty eleven to twenty twelve respectively

Turning into the loan side things were also very strong the u.s. hit record highs and europe realized the highest issuance levels they’ve had in the last five years but not quite as high as they realized in 2007 before the global financial crisis really the main issue there being banks have been retrenching in that market and deleveraging and the syndicated bank

Loan market is less developed in europe so steve how strong demand for leverage that affected the leverage market the the impact has really been pretty far ranging and in general is produced conditions that are favoring borrowers to start one of the things we’ve seen is both the bank loan and the bond markets have been open to issuers even at the low end of the

Rating scale this has helped companies raise liquidity and push out debt maturities we’ve also seen the strong demand lead to lower pricing and companies have repeatedly going back to the markets to lower their cost of capital both of those things are obviously favorable from a credit quality perspective but there have been some adverse developments as well to start

With we’ve seen an uptick in both total debt leverage and senior secured debt leverage primarily as companies are continuing to raise debt to finance dividends much of that has been through loans and for certain companies we’ve seen that impact both the corporate credit rating as well as the issue ratings and recovery ratings in fact that’s one of the items we cite

In the article in terms of a decrease in the average recovery rating for versa lien loans in addition we’ve seen the strong demand lead to a weakening of credit protections and document terms some of the things we cite in the article are more generous baskets for dividends more generous baskets for additional debt we’ve also seen when when loans do have covenants

That those definitions are a little bit more loosely worded but really more significantly in the us covenant-lite term loans are now the market norm and term loan documentation is becoming really more and more bond like this is an ongoing hot topic for investors and something we address in the article in terms of how does that affect our corporate credit rating

How does that affect our issue ratings and we discuss this topic as well in at length in a prior cm tv segment in october of 2013 so looking forward then what’s the outlook like for leveraged finance in 2014 yeah look at 2014 is generally favorable we know several support of macroeconomic factors heading into 2014 we generally see improving economic conditions in

The us and abroad although certain markets like europe or weaker although still improving we also see you know generally good access for leverage credit for both the bond and the bank loan markets so again that’s favorable and thirdly we see generally load default expectations in the u.s. the default rate in 2013 was very low at 2.1 percent we expect that to tick

Up to about 3.1 percent in 2014 but that’s still well below the four point five percent rate that’s the historical average under an issuer basis and in europe the default rate is higher but is improving it was about six point eight percent in 2013 and we see that trending down to about six percent in 2014 of course there’s always a number of macroeconomic factors

And uncertainties that can at least affect the market access piece of the equation things there are no central bank action especially those that aren’t anticipated by the markets similarly and the regulatory front in tightening regulations especially those that aren’t anticipated can affect banks financial institutions and cielos and affected liquidity there and

Of course there’s always a potential shock from sovereign distress or geopolitical events but really that said tying back something i said earlier most corporate have really improve their their balance sheets so they’re much less reliant on the capital market being open to maintain their credit quality and that’s why we really see predominantly stable outlooks

For leverage corporates and then i’m not financial arena all right well steve thanks for that overview of the leveraged finance sector to read the full article titled top 10 global investor questions for 2014 on leveraged finance please visit global credit portal com thanks and we’ll see you next time you

Transcribed from video
Top 10 Investor Questions For 2014: Global Leveraged Finance By S\u0026P Global Ratings