Something exceptional is happening on the market for the financing of companies with credit ratings below investment grade – so called leveraged finance. According to data from investment bank J.P. Morgan, the volume of high-yield bonds and Term Loans B – loans from institutional investors to companies – climbed to a record high in Europe in January. These are mostly refinancings of highly indebted companies in private equity hands, before maturity and at more favourable conditions, or debt-financed distributions by companies to financial investors – known in the trade as „dividend recaps“.

„The leveraged finance market is in full swing,“ said Ales Mydlar, Managing Director and Head of Leveraged Finance DACH and CEE at J.P. Morgan, in an interview with Börsen-Zeitung. „The volume of new issues of high-yield bonds and Term Loan B from issuers with poor credit ratings rose to a record level of 34 billion euros in Europe in January.“ And there is no sign of a slowdown in issuance.

According to J.P. Morgan, around 280 billion euros was coming due for repayment in the leveraged finance market in Europe between 2024 and 2026. The largest transaction in January was a 2.4 billion euro loan from institutional investors to the British veterinary group IVC Evidensia from the portfolio of financial investor EQT, which made headlines in 2022 with the takeover of Germany's largest veterinary clinic. In the high-yield bond segment, power plant operator ContourGlobal, owned by Reservoir Capital, led the way with a bond worth 500 million euros.

„We advise our clients to take advantage of the good conditions,“ says Mydlar. „This is because the market can turn quickly if, for example, there is news of persistent inflation and consequently a continuation of high interest rates."

The risk premium – the spread – compared to almost risk-free bonds with top credit ratings is at a historic low.

This is because credit investors have a lot of capital at their disposal. „In addition, only a few companies are in serious difficulties, although we expect pressure to increase soon,“ explains Mydlar. „Most companies have enough cash to service interest and amortisation.“ When companies obtain new financing now, they generally get better conditions than in the past three years. This is also good for investments.

Last year, leveraged finance volume almost tripled from 120 billion to 306 billion euros compared to 2023. According to J.P.Morgan banker Mydlar, the lion's share, at almost two thirds of the volume, was made up of „Amend Extend“ transactions, and refinancing at more favourable interest rates. In amend & extend transactions, companies – mostly in private equity hands – extend the loan agreements of their highly indebted portfolio companies with the old creditors at new conditions before maturity.

The booming credit markets are a lifeline for private equity firms that need to return money to their investors: „Dividend recaps, which private equity firms use to obtain debt-financed distributions from their portfolio companies, have almost doubled to around 19 billion euros,“ says Mydlar. Car battery maker Clarios recently raised debt to finance a 4.5 billion dollar dividend for private equity owner Brookfield and pension fund Caisse de Depot et Placement du Quebec. The record-high dividend recap took place after the IPO cancellation.

Companies are currently also refinancing earlier, well before their debt falls due. „This usually happens with a lead time of up to two and a half years if there is no great urgency,“ said Mydlar. In today's environment, issuers are also benefiting from the lower borrowing costs compared to a financing that they might have carried out in 2022 or 2023.