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Incoming European leveraged lending guidelines may impact demand

Luke McDougall, Leveraged Finance Partner at Paul Hastings comments on the news that leveraged finance issued so far this year in Europe, the Middle East and Africa (EMEA) has already surpassed last year’s total, reaching a record USD143 billion in the first half of 2017, which is nearly 8 per cent higher than in the whole of 2016…

 
The auction pipeline for the second half of the year is looking good. The activity level we have seen on the buy side, including on CLO formation, indicates this strong demand will continue.
 
However, the incoming European leveraged lending guidelines may impact this demand, both before and after its implementation in November. There are certain deals which could support higher than 6.0x leverage due to come to market before November and there will be a period after implementation where adjustments settle in.
 
Such strong demand has translated into a much higher proportion of covenant-lite transactions in Europe than we’ve seen before, whilst also causing an uptick in leverage for the top credits which took off at the end of 2016. 
 
Also, the terms now available to sponsors is a mixture of US and European practice. There is now a highly developed set of trade-offs between pricing, flexibility, format and structure, including alternative lenders playing key roles as well as investment banks in the capital structure.

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