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Credit markets: Reversal of fortune

The spectacular rally in the US high-yield market this year has spilled over to Europe, raising the tantalizing prospect that, after several false starts, this asset class could finally establish itself. Louise Bowman reports.

Investors squeezed in market melt-up

"IT WAS HELL," reminisced a private equity manager on the podium at a recent leveraged finance seminar. But it wasn’t a lament about the post-Lehman market meltdown but a description of the recent successful sale of an investment to another private equity buyer. "They managed to get bank financing for the deal but it was hell. They had to go through 30 banks to get it."

Such is the scant bank appetite for leveraged lending in Europe – a far cry from how things were before 2007. During the years of cheap capital and credit-churning banks, sub-investment-grade corporates in Europe had a straightforward decision to make when fundraising: loan? Or loan? The advent of secured vehicles such as collateralized loan obligations meant that leveraged loans were invariably the cheapest option for senior debt and second-lien debt was readily available for junior tranches. One product was, however, conspicuous by its absence: high-yield bonds.

This year all that has changed. Some €11 billion of high-yield bonds had been issued in Europe by September, following zero issuance throughout 2008. During the same period there has been a dearth of primary leveraged loan issuance: just €3 billion from 21 deals so far this year, according to the Loan Market Association.

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