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European debt outlook

Q1 2024 overview

Q1 2024 was the European broadly syndicated loan (BSL) market’s busiest quarter since Q2 2021 with volumes increasing to €29.3bn, up 80% from Q4 2023 (€16.3bn) and 173% from Q1 2023 (€10.7bn)[1].

As noted in the previous issue, low M&A volumes combined with successful fundraising from CLOs and the resultant pressure to deploy, has created a window for opportunistic repricing of European leveraged credit. On the back of this, refinancings and recapitalisations accounted for €17.4bn of institutional loan issuance volumes in Q1 2024 (77%) up from €7.5bn in Q4 2023 (65%)[2].

€4.2bn of the refinancing and recapitalisation volumes related to large-cap borrowers returning to the BSL market from the private credit space, to take advantage of the more receptive conditions and lower cost of debt[3].

To cope with higher benchmark interest rates and a slowdown in deal making, we are seeing sponsors increasingly look to net asset value (NAV) financing. These loans are typically at a lower cost than at company level and have been used to pay down debt for portfolio companies or, given the increasing hold periods, for dividends to investors.

In the European mid-market, on a like-for-like basis we observed a decrease in volumes driven by the return of a credible, competitive, financing alternative from the BSL market. Q1 2024 volumes totalled 165 (excluding Italy) marking a 0.2% decrease from Q1 2023 (169) and a 16.7% decrease from Q4 2023 (198)[4].

Despite the long-awaited increase in M&A activity that had been signalled for 2024, deal volume remains subdued so far with total European M&A deal value in Q1 2024 down 12.1% from Q1 2023, and 26.2% from Q4 2023[5]. However, the shift towards the BSL market meant that buyouts and other M&A activity, accounting for €5.2bn of institutional loan volumes in Q1 2024, was up 10.7% on €4.7bn in Q1 2023 and up 30.8% on €4.0bn in Q4 2023[6].

 

Outlook

Momentum in the European BSL market has continued into early Q2 2024, driven by the continuation of opportunistic re-pricings, a trend which we expect to continue in the near-term.

With increased competition at the upper mid-market level, private credit lenders are having to react by offering improved pricing and terms. Increased flexibility being offered by private credit lenders includes PIK-toggles, an increased used of delayed draw terms loans and large uncommitted accordions[7].

The absence of a functioning BSL market in 2023 allowed private credit lenders to move up the size spectrum[8]. However, the BSL market’s return is also likely to see a reversion to the mean for private credit lenders in 2024 with a greater level of activity for companies with EBITDA less than €50m[9].

Despite the improvement in financing conditions, valuation gaps continue to delay the backlog of M&A hitting the market, whilst sponsors with good quality assets are willing to reset their hold period. Lenders may increasingly look to extend debt on key assets in their portfolios before any sale opportunities arise, with an increased demand for portability provisions as a result[10]. Further, we believe an increased trend for dividend recaps and continuation vehicles may materialise as the holding periods continue to increase.

With improved debt markets conditions and equity capital available to fund acquisitions, we anticipate an improvement in M&A activity towards the end of 2024, continuing into 2025[11]. Geopolitical and electoral uncertainties hangover the interim, with elections in the US and UK later in the year. The potential for reduced base rates could also drive an increase in M&A activity.

 

 

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References

*Unless otherwise indicated, all tables, data and statistics provided in this piece, including with respect to deal activity, have been collected via the April 2024 DC Advisory Lender Survey, subject to the limitations of described below.

**Transactions for the Italian region have been sourced from the LSEG Loan Connector (which is a publicly-available web-based loan information platform), as well as company press releases and filings, but has not otherwise been independently verified with the lenders (except as provided below). The region has been incorporated into the Debt Market Monitor from Q1-24 and therefore, transactions are only reported for this Q1-24 period.

The April 2024 DC Advisory Lender Survey: (DC Advisory’s independent survey of 98 European banks and direct lenders. which was completed in April 2024 and conducted across UK, France, Germany, Austria, Switzerland, Spain, Belgium, Netherlands and Luxembourg (referred to herein as the “The April 2024 DC Advisory Lender Survey” or the “Survey”). Any such data, including league table data referenced herein is limited to the data provided by the Survey participants and is not meant to constitute definitive market data. The banks and lenders selected for the Survey are based on those that are most active in the market, and that DC Advisory interacts with the most. Accordingly, the Survey participants do not constitute an exhaustive list of banks and lenders who may have been active during the period addressed by the Survey. Comparisons to deal activity or other statistics from prior quarters or other periods are calculated by comparting the results of the Survey to the results from DC Advisory Lender Survey corresponding to the prior period, subject to the same limitations described above.)

 

[1] LCD Pitchbook European Credit Markets Quarterly Wrap Q1 2024

[2] LCD Pitchbook European Credit Markets Quarterly Wrap Q1 2024

[3] LCD Pitchbook European Credit Markets Quarterly Wrap Q1 2024

[4] The April 2024 DC Advisory Lender Survey

[5] https://pitchbook.com/news/articles/europes-direct-lenders-respond-to-bank-challenge-patchy-m-a-outlook

[6] LCD Pitchbook European Credit Markets Quarterly Wrap Q1 2024

[7] https://pitchbook.com/news/articles/europes-direct-lenders-respond-to-bank-challenge-patchy-m-a-outlook

[8] https://www.privatedebtinvestor.com/loan-note-the-broadly-syndicated-fightback-debt-funds-register-strong-performance

[9] https://pitchbook.com/news/articles/europes-direct-lenders-respond-to-bank-challenge-patchy-m-a-outlook

[10] https://pitchbook.com/news/articles/europes-direct-lenders-respond-to-bank-challenge-patchy-m-a-outlook

[11] https://www.dcadvisory.com/news-deals-insights/insights/european-private-equity-mid-market-monitor-q1-2024-outlook/