After the volatile market environment caused by Covid-19, the next shock was not long in coming. After rapidly increasing tension in the preceding months, the Ukraine-Russian-crisis escalated with the Russian invasion of Ukraine in February. Since then, it has become evident that the invasion has a material impact on economic activity and inflation in Europe through skyrocketing energy and commodity prices and the disruption of international trade. Inflation rates reached a climax in Q2 2022 denting consumer confidence all over Europe. To counteract the inflationary pressure, the ECB is poised to further raise interest rates in Q3 2022 (by 50bps in July with a further increase anticipated for September).
Unsurprisingly, European debt markets are severely affected by deteriorating consumer sentiment and the overall worsening of the economic outlook. As assumed in our last publication, when economic consequences were just beginning to unfold, it is now evident that activity for debt financing in Europe remained low throughout the quarter. Debt markets were characterised by an increase in interest rates and a surge in financing costs, especially for lower-quality borrowers. Lenders are increasingly reserved in credit approval processes, resulting in more restrictive lending policies with (indicative) financing offers being only valid for a very short period. We expect the uncertainty to prevail in the upcoming months and an ongoing redefinition of the status quo to shape the course of the second half of the year.
Partner, Deal Advisory
KPMG AG Wirtschaftsprüfungsgesellschaft
- The SSD market underpinned its resilience in challenging macroeconomic environments by recording the highest quarterly issuance volume since Q2 2008. This remarkable performance was driven by a larger share of rated companies taking advantage of the more attractive funding costs compared to the bond markets alongside a relatively high number of non-German issuers. Noteworthy: SSD with ESG features exceeded the 50% threshold in terms of total issuance volume for the first time in Q2 2022.
- In contrast to the SSD segment, the leveraged loan market collapsed, ultimately recording the lowest quarterly volume since Q4 2012. Postponed transactions and increased spreads were some of the effects of the current geopolitical situation and the macroeconomic environment.
- In addition, IG loan volume declined considerably by ~40% (YoY) as companies tended to use existing funds for M&A, hence tapping the market only selectively for additional debt financing.
- Less favourable market conditions severely impacted the sponsored loan market with the number of transactions decreasing from 33 to 6 while the volume fell by ~71% (YoY). With traditional lenders being more reluctant, sponsors tended to favour the transaction security and higher flexibility provided by alternative lenders. Therefore, the private debt sphere, still having a significant amount of dry powder to deploy, absorbed the majority of sponsored transactions from Q2 onwards.
- The high-yield bond market continued to bear the brunt of the issuance drought in Q2 2022 and remained effectively closed after Russia’s invasion of Ukraine. Unsurprisingly, issuance volume in the first half of 2022 (~€15.3bn) was at its lowest level since H1 2009. The ~€4.5bn placed in Q2 2022 is mainly attributable to defensive BB issuers tapping the market by the end of May.