Executive Summary
DEVELOPMENT OF Q4 2020 IN GERMANY & EUROPE – KPMG COMMENTARY
While we see varying degrees to which national governments have once again tightened COVID-19 restrictions, fearing a rapid spread of coronavirus mutations, a large number of companies, especially in strongly impacted industries, is combating the liquidity burn caused by the economic shutdown
Towards the end of the year, however, the approval of the BioNTech/Pfizer vaccine by the EU Commission brought a glimmer of hope to the markets as rapidly achieving herd immunity through vaccination appears to be the most promising means to get the pandemic under control Yet, limitations in production capacities and distribution problems may further delay the longed for re-opening process.
From frequent contact with market participants (i.e. banks, equity/debt funds and other alternative investors), we draw the conclusion that sponsors and lenders are generally open for business and prepared to invest, even more so in established, bullet-proof businesses As a consequence, competition for high quality investments has further increased over the past months, resulting in a continuation of the recent climb of transaction and leverage multiples Spreads have normalized on a classic risk-adjusted basis. Along those lines, another pandemic-driven jump in interest margins across all asset classes and industries, as could be observed in Q2, is currently not being expected
Contrary to the expectations of many, the predicted wave of insolvencies has not yet hit the market. However, we can expect increased restructuring activity in the
Source(s): BNP Paribas, Fidelity, KPMG Research, S&P LCD.
coming months as there are a lot of companies around that have made use of various life-prolonging measures to keep themselves above water up to this point Further months of lockdown will most definitely keep putting a strain on these companies, making it more and more difficult to source new financing.
INSIDE THE MARKETS
Leveraged Loans
European leveraged loan volume came in 20% down compared to last year as it has been mirroring the course of the pandemic throughout the year. After the market took a hard hit with a significant volume collapse from €26.5bn in Q1 to €11.7bn in Q2, we saw a rebound to €16 5bn at the end of Q3 In line with the tightening of COVID-19 restrictions and growing uncertainty in the market, Q4 saw spreads again increasing slightly while new-issue volume fell back down to €10.6bn.
Sponsored Loans
With only €44bn issued in the sponsored loan space throughout 2020, total volume decreased by 18% compared to 2019 as investors were confronted with unprecedented levels of uncertainty across various industries As a result, a large number of buyout deals got postponed, filling up the pipeline for the coming year. Moreover, syndication of M&A deals announced in Q3 and Q4 will to a large extent take place in 2021.
Schuldschein Loans
The Schuldscheindarlehen (SSD) segment achieved a decent result in Q4 (€5.4bn) leading to an annual issuance volume of €18.6bn among 102 transactions. This can be viewed as a solid full year performance as the SSD market saw a significant drop in transactions between March and May 2020 However, the segment managed to show resilience as issuers were willing to accept higher pricing and a shift to shorter maturities
Investment Grade Bonds
Corporate investment grade bonds were in strong demand all of 2020 due to investors’ appetite for high
quality papers Moreover, the financial support that governments and central banks keep providing remained to be a tailwind for the asset class During Q4, this development was positively boosted by news surrounding the US election and first vaccine administrations in Europe which have mitigated investors’ fears. This, alongside the ECB’s massive stimulus, had spreads tightening back to the low levels from February 2020.
High-Yield Bonds
For the high-yield bond market, Q4 marked the highest quarterly new-issuance volume ever, as the same news had investors’ optimism and risk appetite rocketing. Another driver of this development was the influx of double-B issuers such as fallen angels Lufthansa, Rolls Royce, Schaeffler and many others who tapped the market for refinancings.
Sustainable Financing
The sustainable financing markets reported record numbers with e.g. green, social and sustainability bonds doubling in terms of volume compared to last year This clearly shows that an increasing number of companies endeavors to embed sustainability in their business models and financing structures, especially in the context of the ongoing pandemic and its socio-economic implications that we are most certainly going to be dealing with for many more years to come
MOST RECENT DEVELOPMENT IN EARLY 2021
Financing markets continue to be competitive since the turn of the year Most recently, several downward repricings could be observed in the leveraged finance market – good chances to improve terms for borrowers with stable business models.
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