In the general environment of uncertainty and gloom in the city, there are a few rays of light – of varying brightness.  Some of them are genuinely bright – areas of fixed income new issues have had a truly bumper year, demand for convertible bonds continues and issues are coming fast and furious.  And then there is Leveraged Finance, which is being talked up as a hot area for all sorts of activity … next year.   So is it true, or is it all talk?

The leveraged Finance market in the UK is relatively new and compared to the States a minnow.  The expectation and indeed excitement, follows the maxim that whatever happens in the States will at some stage happen in Europe.    Certainly in the States where ‘Junk bonds’ first famously evolved under the specialist house Drexel Burnham Lambert, the market remains active and for many people, highly lucrative.  The high yield market (issue of higher risk bonds) that forms part of leveraged finance has had a busy year in the US.  Many people anticipated   take-off in high yield in Europe this year, but it hasn’t happened.   

Activity this year was slow, partly due to the telecom malaise, since telecoms had been the largest section of high yield issuance.  The slow-down was exacerbated by the events of September 11th that dealt a major blow to the secondary market and had a depressing effect on the primary market.  So, will it rebound next year? 

The answer at a recent Leveraged Finance Conference in London (hosted by IBC Global Conferences) was a resounding, yes.  The cynic of course might respond, ‘Well, they would wouldn’t they,’ since it was attended by Leveraged Finance professionals who are desperately hoping for a busy 2002.  But they did make a compelling case.  The hope is that there will be a meeting of the expectations and therefore price between issuers and buyers.  The general consensus was that the money is out there in the form of Private Equity, CDOs, and institutional funds, and that there are deals to be done, given various expectations surrounding mergers and buy-outs.  Above all the inhibiting factor is confidence.  And that is a most elusive quality. 

The American equity markets appear to be demonstrating a return of confidence.  The war is over and apparently won.  The European market should pick up on this confidence and momentum, as 2002 opens.  The confidence will remain shallow and vulnerable however, as long as there remain fears about further military activity – every now and again we hear American talk of extending the target areas.  That would certainly knock confidence.  That would stop investors having the nerve to look again at funding leveraged deals.  All areas of financial services are influenced by the economic consequences of dramatic world events, but the Leveraged Finance area must be most vulnerable because it is by its nature high risk.  So the conclusion is, that in calm seas, Leveraged Finance will be busy next year, but if the stormy weather picks up again, it will remain essentially dormant.

Amber has had a city career covering fixed income sales, corporate finance and venture capital.  She is now using her many contacts, some garnered from her enthusiastic attendances at conferences, to help build up a new city head-hunting business, i-search Ltd.

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