OREANDA-NEWS. Fitch Ratings says in its latest European Leveraged Finance Highlight that corporate borrowers with unitranche financings under EUR200m tend to be rated lower than their counterparts in the broadly syndicated leveraged loan market.

Fitch's credit opinions on unitranche deals are clustered at the lower end of the 'B' category. This is due to issuers' idiosyncratic risks, typically reflected in small scale or a lack of diversification that limit their ability to absorb negative one-off events or deteriorating market conditions.

While the unitranche market in Europe is growing, it lacks the maturity of its US counterpart and the future of the asset class will depend on its ability to mitigate defaults and demonstrate resilience through the cycle.

The unitranche product has been developing in Europe since the financial crisis in 2008 as an alternative to bank financing for small and mid-market corporates. Unitranche transactions are structured to blend the cost and total debt profile of a standard senior loan plus subordinated mezzanine debt. Non-bank credit funds providing unitranche financing typically negotiate the structure directly with financial sponsors to minimise execution risk in a leveraged buyout.

Unitranche deals in Fitch's European leveraged credit portfolio are characterised by bespoke structures that ensure financial flexibility and support growth for issuers in a non-amortising and primarily fully covenanted environment. These structures are typically more expensive than syndicated loans for borrowers at the smaller end of the market (debt committed below EUR200m) but enable them to support higher leverage than in the syndicated loan market.

Fitch's European Leveraged Finance Highlight series features trends in the high yield and leveraged finance markets with analysis and the factors to watch in the near term.

The comment is available on www.fitchratings.com.