European borrowers in industrials, chemicals and materials businesses took full advantage of favorable capital markets in Q1 2021. These industries—covering everything from equipment and machinery to industrial gases and agrochemicals—sought to refinance existing loans at cheaper prices and extend maturities where possible to cope with the ongoing impact of COVID-19.
In Western and Southern Europe, this resilient Q1 2021 leveraged loan and high yield bond activity was one of the key drivers of overall issuance, which reached US$10.4 billion.
Activity was particularly heated in the high yield bond space for industrials, chemicals and materials, with issuance for the quarter totaling US$4.4 billion—more than double the US$2 billion issued in Q1 2020.
This was the third-highest quarterly total for high yield bonds in the sector since the beginning of 2015. During this time, higher issuance levels were only seen in Q2 2020, when high yield bond issuance spiked to US$8.6 billion as borrowers rushed to secure liquidity due to COVID-19 lockdown restrictions, and in Q4 2017, when issuance (US$6.4 billion) was boosted by a series of larger deals, including a US$1.8 billion repricing by security systems business Verisure.
In the leveraged loan space, industrials, chemicals and materials companies raised US$5.9 billion in Q1 2021. As was the case in the high yield bond market, leveraged loan issuance by such companies also spiked in the first half of 2020 before stabilizing as their liquidity improved.
Refinancings and repricings drive issuance
In both the leveraged loan and high yield bond markets, issuances by European industrials, chemicals and materials groups were dominated by opportunistic refinancings, repricings and amendments.
High yield bond activity earmarked for these purposes reached US$4.2 billion in Q1 2021, accounting for almost all of the sector’s issuance for the quarter. No other quarter has seen more repricing, refinancing and amendment issuance by industrials, chemicals and materials companies going back to 2015.
Patterns were similar for leveraged loans, where repricings and refinancings by industrials, chemicals and materials businesses in Q1 2021 increased more than seven-fold from Q4 2020 levels to reach US$5.6 billion.
European companies in these industries that raised costly financing before the pandemic disrupted supply chains and prompted delays in client payments took advantage of buoyant debt markets to refinance or reprice bonds at improved rates.
M&A will build further momentum
There is also an expectation that industrials, chemicals and materials companies will bring opportunities for investors to fund M&A and LBO deals—even though M&A-related issuance in these groups trailed refinancing and repricing activity in Q1 2021.
After a period of dislocation due to the pandemic, industrials, chemicals and materials companies have adjusted and traded well. The Stoxx Europe Chemicals Index is up by more than 35% over the 12 months ending April 2021.
M&A activity has rebounded against this supportive backdrop, with Western and Southern European industrials and chemicals deal value coming in at US$35.7 billion in Q1 2021. Although this was down from the US$44.2 billion posted in Q4 2020, deal value for the first three months of 2021 was almost four times higher than the US$9.4 billion figure recorded in Q2 2020.
Lenders have shown a strong appetite to finance M&A transactions in these areas. Chemicals giant Ineos, for example, was able to raise euro-denominated bonds valued at €1.3 billion, as well as a US$500 million US dollar bond, to finance its carve-out of BP’s petrochemicals division.
The current supply-demand imbalance in leveraged finance markets indicates that any deals in industrials, chemicals and materials will continue to find strong investor and lender support when raising capital.
The ESG effect
A growing feature within industrials, chemicals and materials deals is the inclusion of environmental, social and governance (ESG) elements, usually offering an ESG-linked margin ratchet that provides for a discount or premium depending on compliance with ESG criteria.
ESG has become an important factor for lenders when assessing credit quality, and industrials, chemicals and materials borrowers with sound ESG practices have been able to negotiate small discounts to the margins of their loans.
For example, Carlyle Group’s carve-out of drive technology firm Flender from Siemens—financed with a €1.04 billion loan facility—included a margin ratchet that would reduce the cost of the loan by between five and 10 basis points if Flender’s wind turbine gearboxes met power volume targets.
In the high yield bond markets, meanwhile, appetite for ESG issuance in the sector has also been robust. In Europe so far in 2021, there has been €12.6 billion in ESG high yield bond issuance from 33 deals, according to Debtwire Par. Seven of these deals have involved industrials, chemicals and materials companies, accounting for €3.3 billion in issuance, ranking industrials, chemicals and materials as the largest sector for ESG high yield bond issuance thus far.
With borrowers and investors more focused on public health and climate change, good ESG practices will continue to enhance the attractiveness of a credit in the industrials, chemicals and materials sector.
