Leveraged finance issued so far in 2017 has already surpassed last year's total

Lucy White
Leveraged finance reached a record $143bn in the first half of 2017 (Source: Getty)

The total amount of leveraged finance issued so far this year in Europe, the Middle East and Africa (EMEA) has already blown last year's sum out of the water, according to a Moody's report.

Leveraged finance, or the borrowing of money for uses such as financing mergers and acquisitions (M&A) or completing refinancings, reached a record $143bn in the first half of 2017, the data reveals, 7.6 per cent higher than in the whole of last year.

This was helped by a leap in June's leveraged loan volumes to $13.5bn, from $6.1bn in May, and soaring high-yield bond volumes which reached $8.7bn.

Read more: The UK stock market is an "over-leveraged disaster" according to Societe Generale

“The strong activity in leveraged finance reflects activity levels in M&A and refinancing. A lot of debt activity is a good sign from a market and activity perspective – we are in a pretty frothy market at the moment as there is bucket-loads of liquidity,” said Investec's Callum Bell.

“There are some great businesses being bought which command high leverage, but there's a cycle in the background and leverage is at or very close to its peaks.”

Earlier this year, the European Central Bank issued guidance saying that leverage ratios – the amount of debt committed to a transaction compared to equity – should not exceed six times.

“Generally the six-times leverage ratio cap guidance is being stuck to on the senior secured debt, but it is passing this level on strong businesses when more subordinated tranches are taken into account,” said Bell.

Read more: Leverage is all the rage: The crucial future task for central banks

A significant part of the increased leveraged financing may also have been due to businesses refinancing, as they take advantage of lower debt pricing and aim to lock in cheap finance.

“There's definitely more refinancing going on. Quarter four was pretty quiet last year, so quarter one was a very big quarter – particularly for jumbo deals,” said Bell.

“A lot of large deals were put off at the end of last year and ended coming out this year, due to the US elections and the post Brexit lull.”

However, the current rate of leveraged finance issuance may not last.

"Potential pushback from investors on the price and size of increasingly aggressive transactions, central bank monetary tightening and the fact that August is traditionally a slow month for markets will make it tough to maintain the current pace of issuance in the second half of 2017," said Peter Firth, associate managing director at Moody's.

Read more: A diet of debt: Should spiralling levels of leverage worry investors?

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