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Continued volatility drives structural shift in corporate funding landscape

13 January 2016

Allen & Overy said today that last year’s M&A boom helped keep total funding for corporates above USD6 trillion in 2015 for only the second time in history. While the value of loans globally was down 2%, the return of ‘super-jumbo’ loans fuelled a 6% rise in the value of investment grade lending.

A&O’s annual Corporate Funding Monitor, which has been compiled using Thomson Reuters data, looks at how businesses (excluding FIG and real estate) were financed in 2015 as well as the maturity profile for loans and bonds up until 2020. The research shows the clearest trend in 2015, strong in both the U.S. and Europe in particular, was the return of investment grade loans as the primary source of funding for high quality corporates at USD1.65tn just behind the pre-crisis peak of USD1.71tn. It was also a record year for follow on equity issues (any common/ordinary offerings subsequent to a company’s original IPO) with almost USD450bn of new capital issued by public companies globally.

While investment-grade lending increased, other parts of the market have not been without their challenges –
most notably in leveraged loans, which dropped sharply in 2015 after two years of strong growth. The U.S. was hampered by deterioration of the oil and commodities sectors, syndication issues and the Federal Reserve’s leveraged lending guidelines, contributing to a drop of 38% year-on-year for new leveraged loans. Although sub-investment grade lending will continue to be vulnerable to uncertainty and tighter credit conditions, there will be greater flexibility in the European market. U.S.-style covenant-lite loans accounted for around half of European leveraged lending in 2015 according to S&P Capital IQ – this is part of a broader trend of innovations crossing the Atlantic. While European credits have historically tended to tap the U.S. markets for better terms, 2015 saw some of that flow begin to reverse.

Another key development has been the maturing of the European high-yield bond market which is now seen as a normal instrument in the corporate finance toolkit of the CFOs and treasurers of any sub-investment grade company in Europe. Although issuance dropped markedly last year compared to 2014, total high-yield issues in Europe now account for around one-fifth of the wider European corporate bond market and were up 205% over 10 years to USD80bn in 2015. The growth of the European high-yield market may also be aided by the addition of some U.S. issuers due to lower all-in-yields resulting from QE and lower prevailing interest rates in Europe as well as structures that are increasingly familiar to American corporates. The strength of the U.S. dollar may also make issuing Euro denominated debt attractive for companies with U.S. dollar revenues.

Richard Cranfield, partner and co-head of FIG at A&O said: “The jumbo M&A trend in 2015, which required large-scale bridge financing, has resulted in a sharp rise in the number of loans scheduled to mature in 2016 which will contribute to a bumper year for bonds. Of the USD360bn lent to corporates in the top 20 investment grade deals, 38% was bridge finance – we envisage these loans will be refinanced in the investment grade bond market with little difficulty. There should also be a larger amount of mid-market transactions in both the M&A and IPO markets this year, with a particular focus on technology and healthcare, as banks expand beyond the big ticket deals in hope of higher margins. As the appetite for M&A continues, we expect that quality corporates won’t be deterred by the likes of incremental interest rate rises as this will make little difference to the availability and affordability of funding.”

Despite the fluctuating ebb and flow of the market, the overall level of funding has stabilised and the data are starting to show patterns and trends that look set to continue. Corporates are enjoying easier and cheaper access to investment-grade loans, if they are eligible, and a wider variety of sub-investment grade alternatives if they are not. There is a steady flow of loans and bonds maturing each year (around USD3tn) until 2020, indicating a healthy flow of transactions over the next few years.

For further information, please contact Susanna Robinson,, on +44 (0)20 3088 3918.