Euro Zone: Confidence Takes Another Hit

Fitch Ratings says in a new special report that euro zone uncertainty and its impact on broader credit markets may compromise the momentum seen in primary and secondary European leveraged credit markets. An extended period of volatility in the second half of the year is likely to increase the uncertainty over capacity to refinance the wall of EUR200bn of maturities coming due between 2013 and 2016.

“Notwithstanding short- and medium-term capital market concerns, economic recovery and pro-active cost cuts contributed to further de-leveraging, declining default rates and stabilisation in Fitch’s portfolio of about 300 Credit Opinions.”

Cecile Durand-Agbo

“Confidence Takes a Hit: Euro-zone uncertainty may compromise the recent H111 momentum in primary and secondary European leveraged credit markets. An extended period of volatility into H211 could stall the virtuous cycle in bond and loan capital markets that led to a recovery in primary market volumes, and raise further uncertainty over capacity to refinance the EUR200bn of Fitch Ratings’ portfolio of about 300 European leveraged Credit Opinions maturing in 2013 and 2014,” the rating agency writes in a new special report.

“Notwithstanding short- and medium-term capital market concerns, economic recovery and pro-active cost cuts contributed to further de-leveraging, declining default rates and stabilisation in Fitch’s portfolio of about 300 Credit Opinions,” says Cecile Durand-Agbo, Director in Fitch’s Leveraged Finance team in London.

Adding: “However, leverage remains high and unless the de-leveraging progress is accompanied by renewed risk appetite and flows into bond and loan markets, the level of restructurings is likely to materially increase in the next two to three years.”

Renewed risk appetite would allow a step-change increase in the ability of issuers to refinance, Fitch points out.

A record pace of high yield bond issuance and strategic sales of leveraged credits reinvigorated the institutional loan market in H111 and set the stage for more aggressive underwriting.

“When HY notes repay legacy loans they represent unscheduled ‘pre-payments’ to collateralised loan obligation managers and allow them to recycle cheap funding proceeds from 2006 and 2007, by ‘reinvesting’ and therefore support institutional loan market volumes in the short-term,” says Edward Eyerman, Head of Fitch’s Leveraged Finance team in London.

However with re-investment periods expiring in 2013 and 2014 for most European CLOs, declining volumes of prepayment will limit underwriting appetite.

“In the absence of new loan and bond market capital formation, a potential funding cliff may develop in 2013 and 2014, exacerbating the threat of the refinancing wall,” Fitch Ratings says.

Here’s a copy of the full report:

Fitch Special Report: European Leveraged Credit Review – “Capital Market Volatility Stalls Momentum”

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