Credit Markets 2016-17
Welcome to our fourth issue of EY Credit Markets.
We would like to thank those clients, colleagues, lenders and other market participants who have provided feedback on previous issues – your comments have played an important role in guiding this issue’s content.
We are proud of EY Credit Markets, and we hope you find it useful. Our global partner contact details are included opposite, and we are always pleased to meet, chat and share market views – so please don’t hesitate to get in touch.
2016 was a year dominated by global political events, and another strong year for credit markets worldwide.
Global credit markets traded through periods of political uncertainty, supported by solid credit fundamentals, continuing support from global central banks’ stimulus measures and a continued acceptance of the world after the global financial crisis.
2016 was also another important year for our global Capital and Debt Advisory platform. We now have a team of over 100 advisors across the world, with offices in all key markets, including the US, Europe, Australia, the Middle East and China. Globally, we have advised on more than 70 deals with a value of over $25bn.
We look forward to working with you this year, and wish you all the best for the remainder of 2017.
Credit markets 2016-17
2008 to 2016 saw significant social, political and economic change in the wake of the global financial crisis.
2016 was dominated globally by macro political events and social unrest. Politically it was a year of great change, and yet most global credit markets remained stable, with their underlying fundamental drivers remaining strong.
2017 looks like a year in which access to global credit markets will depend, more than usual, on global political events.
High liquidity levels for European leveraged debt markets drive issuance volumes
Despite market uncertainty, Leveraged Loan issuance in 2016 was resilient and in line with 2015’s. High liquidity levels and lack of supply created a borrower-friendly environment with lower pricing, higher leverage appetite and looser documentation (including an increase in covenant-lite transactions).
For 2017, it is expected that market demand will continue to exceed supply, driving competition among lenders. As a result, we believe the market will see further innovation in leveraged finance solutions and increasingly borrower-friendly terms to differentiate offerings among competitors.
Competitive tension prevails for investment grade borrowers
Many of 2015‘s themes in the UK and European investment grade debt markets persisted into 2016.
As mainstream M&A volumes remained supressed, lender demand continued to exceed supply, with a lack of issuers coming to market. Unsurprisingly many issuers’ timetables were dictated by the global economic calendar, as borrowers looked to avoid transacting during periods of heightened market volatility.
Despite the growing uncertainties surrounding the timetable and potential ramifications of the UK EU referendum result, shifting US government policies and looming European political events, debt markets should continue to offer corporates financing options at historically attractive costs.
Mid-market and corporate
Unprecedented ‘good times’ for borrowers continue as liquidity remains high
2016 was quiet for the UK mid-market, caused predominantly by political anticipation and uncertainty.
The EU referendum result preceded a busier than usual summer, with a push to complete transactions while the markets were buoyant and there was a degree of short-term certainty.
Despite the uncertainty, there have never been more options in the mid-market for borrowers, with both alternative lenders and the public markets offering new lending products, and the number of alternative lenders willing and able to write large tickets almost doubling in the past 12 months.
Looking ahead to 2017, we believe uncertainty is the only certainty, but, as we saw after 2008’s deep economic shocks, markets quickly adapt to a “new normal”.
UK leads the rest of Europe as asset-based finance’s popularity continues to rise
2016 saw the appetite for asset-based finance (ABF) continue to rise, as management teams and financial sponsors continued to become aware of its benefits. A significant number of transactions which EY’s UK CDA team advised on during 2016 saw an ABF facility form part of the financing structure being put in place.
The big question for 2017 is how the various ABF lenders respond to the increased competition and favourable conditions for borrowers.
Global credit rating outlook
Ongoing increase in defaults recorded in 2016
Following on from 2015, 2016 saw a continued increase in defaults, with the global default tally already reaching 120 issuers by September, compared to only 100 in 2015.
In line with 2015’s increased number of defaults, rating downgrades as a portion of rating actions took over rating upgrades, continuing the reversal started in 2014.
Interestingly, Moody’s and S&P anticipate slightly opposite scenarios for 2017
We expect uncertainty to remain elevated. Political risk is expected to stay on the agenda, with important elections in France and Germany among others which could potentially impact the global economic environment.
Global interest rate outlook
A year packed with surprises
Overall it’s been a particularly volatile year for GBP swap rates and UK gilt yields.
In the immediate aftermath of the EU referendum, interest rates fell sharply and sentiment was such that economists predicted a further BoE Base Rate cut.
Since then GBP interest rates have been trending higher. Initially economic data has not been as weak as feared, although economists warn it’s still too soon to gauge the referendum decision’s full impact.
So what will 2017 bring?
When we advise clients we look at economists’ forecasts and compare these with what the interest rate swap curve is implying. While the UK is likely to remain in a “low for long” interest rate environment, we may not breach 2016’s historically low GBP swap rate and UK gilt yield levels.