Leveraged finance markets in Spain faced ups and downs in the first half of 2022, kicking off the year with a busy first quarter before macro-economic and geopolitical volatility slowed activity significantly.
Leveraged loan issuance in Spain came in at US$9 billion in Q1 2022 (the third-highest quarter since 2015) as a strong pipeline of deals that built up at the end of 2021 hit the market. In Q2 2022, however, issuance dropped to US$1.3 billion, as Spanish activity moved in sync with the wider downturn across Europe due to multiple headwinds, ranging from high inflation to market dislocation resulting from events in Ukraine. This brought H1 2022 leveraged loan issuance down to US$10.4 billion, 38% below the US$16.7 billion recorded during the same period in 2021.
The decline in the Spanish high yield space has been even more pronounced, with issuance down 80% year-on-year from US$7.6 billion in H1 2021 to US$1.5 billion in H1 2022.
Challenging outlook
The outlook for the rest of the year remains challenging, with rising interest rates, sustained inflation and increasing energy costs continuing to weigh on the market.
In July, Spain’s National Statistics Institute reported inflation of 10.8%, as consumer prices in the country climbed at the fastest pace since 1984. The government has put together a support package for businesses and households, including fuel subsidies and cuts on electricity taxes, but rising prices are expected to remain an ongoing challenge for the Spanish economy for the next 6 to 12 months.
The European Central Bank’s decision to raise its key interest rate for the first time in 11 years, by 0.5%, in July is likely to influence leveraged finance activity in Spain for the rest of the year. Borrower costs will rise in line with higher interest rates, and investors are expected to continue taking a cautious approach to risk in a volatile market.
This challenging environment is also expected to see a higher volume of restructurings in the next 12 to 18 months.
So far this year, restructuring activity has been muted, with only a handful of deals. In January, Spanish digital bank Wizink agreed a debt restructuring deal with bondholders that will see lenders take a stake in the business in return for a cash injection and debt reduction, as well as maturity extension on debt issued by a special purpose vehicle that owns close to half of the bank and is controlled by private equity firm Varde Partners.
Spanish real estate investor Haya Real Estate, meanwhile, agreed a restructuring deal to refinance and recapitalize debt maturities falling due this year.
Restructuring volumes, however, are expected to increase through the second half of 2022 and into 2023. An insolvency moratorium introduced by Spain’s government through the pandemic was finally closed at the end of June following several extensions. The moratorium suspended the obligation on debtors to file for insolvency and blocked creditors from filing insolvency petitions against borrowers.
The winding down of the moratorium will force companies that have avoided restructuring situations thus far to take action. The Spanish legislature will also shortly approve reforms to the country’s insolvency regime, designed to speed up the insolvency process, support out-of-court settlements and encourage business recovery. These measures are also expected to see more restructuring processes progress.
Deals and direct lending
Despite the challenges facing the Spanish debt market, M&A activity is expected to keep debt issuance active in the second half of the year.
Buyout leveraged loan issuance in particular has proven resilient, with US$4 billion of issuance in H1 2022, accounting for more than 40% of total Spanish leveraged loan issuance during that period. More buyout-linked activity is anticipated.
A financing package for the merger between Italian business processing outsourcing group Comdata, backed by Carlyle Group, and Spanish counterpart Konecta, backed by Intermediate Capital Group (ICG), is the next sizeable buyout-backed deal coming to market. Madrid-based Konecta will merge with Comdata to provide an exit for Carlyle Group. The newly merged company will be headquartered in Madrid and, according to Debtwire Par, the deal could secure close to €1.5 billion of debt financing.
Big ticket corporate M&A will also keep bankers and investors busy. At the end of July, telecoms groups Orange and Masmovil announced a jumbo €18.6 billion merger of their Spanish businesses to form the largest telecommunications player, by customer numbers, in the Spanish market. The deal will be financed with a €6.6 billion debt package provided by a large pool of banks.
Despite a challenging macro-economic backdrop, Spain’s leveraged finance markets are still in line for a busy year ahead.