OREANDA-NEWS. Fitch Ratings says that the Brexit vote is likely to have a limited impact on leveraged loan issuance by single 'B' category European borrowers. In its latest 'European Leveraged Loan Chart Book', Fitch highlights that CLOs have issued at lower spreads on senior notes post-Brexit, as lower global government bond yields amplify the search for both safety and yield. Interest margin levels and covenant structures in the senior loan primary market so far reveal little variance compared with pre-referendum conditions.

New issue volumes may suffer among mid-market sterling deals in consumer-discretionary, travel and real estate-related sectors. But given the relative post-referendum macro stability and credit market support from the ECB's Corporate Sector Purchase Programme, Fitch expects private sector investors with long-term horizons will continue to embrace the high spreads and senior secured ranking of European leveraged loans.

However, despite record equity market valuations and borrower-friendly documentation prevailing after the Brexit vote, median senior debt and total debt multiples stabilised about 5x EBITDA in 2Q16. Risk appetite has been constrained for subordinated debt, where volumes will likely remain subdued, especially as top-line revenue and profit growth estimates are at risk of being revised lower for many sectors following the referendum.

The main constraint to issuance remains valuations, with EV multiples in primary market transactions approaching 10x EBITDA. Competition from trade buyers for larger transactions remains fierce so sponsors appear willing to pay premium valuations for small to medium-sized growth-oriented fintech, medtech, on-line gaming companies and business services sectors with high barriers to entry. PAI Partners' recent secondary buyout of Sweden-based medtech company Atos Medical from EQT is representative of this trend. As dividend recapitalisations remain an option for credits with tested business models, secondary buyouts may increase if IPO markets remain volatile.

While the Brexit vote had no immediate impact on pricing and terms in the primary market, it may have longer-term consequences on the credit quality of leveraged loan borrowers as Fitch downgrades its UK and EMEA growth forecasts.

Fitch's portfolio of 400 European leveraged credit opinions (COs) remains weak with around 50% of the portfolio carrying 'b-*' and below COs as of June 2016. The "at-risk" portfolio, which captures

'b-*'/Negative Outlook and below COs, remains small compared with 2008-2012, but rose to 13.3% of the total portfolio in 1H16 from 12.7% at end-2015. Some 2014 vintage transactions reliant on aggressive M&A strategies have compromised their deleveraging profiles as expected profit growth and cost savings have not materialised.

Post-referendum economic uncertainty could weigh on Fitch's most vulnerable leveraged issuers, particularly those exposed to the UK domestic economy and therefore support further growth in the 'at-risk' portfolio. Fitch's UK CO portfolio has more than 30% exposure to cyclical consumer-oriented sectors and any material weakening in consumer or business confidence that spreads from the UK to Europe could lead to downgrades and Outlook revisions to Negative.

Not all borrowers in the 'at-risk' portfolio will default. But Fitch expects loan defaults to rise slightly from current record lows, while remaining below historical average. The European leveraged loan universe benefits from strong business profiles inherent in post-crisis credit selection. As these transactions have been refinanced into long-dated maturity profiles at lower coupons, the portfolio exhibits generally sound debt service capacity and balance sheet liquidity. However, expected recovery for senior lenders remains under pressure from high senior leverage and reduced junior debt buffers in recent transactions.

Fitch's latest "European Leveraged Loan Chart Book", is available on www. fitchratings. com or by clicking the link above. It includes updated data on primary market trends, loan performance, median credit statistics for different cohorts of issuers as well as recent trends in default and recovery rates.

In this edition, the agency has segmented its default rate statistics by borrowers' debt size (below EUR200m; between EUR200m and EUR500m; above EUR500m). The data and analysis is based on Fitch's portfolio of private credit opinions, private ratings and public ratings on about 400 European leveraged credits (as of 30 June 2016), primarily LBOs, representing about EUR320bn of committed senior and junior debt.