European economic outlook

  • The European debt markets have seen another challenging quarter. Despite an increase in volumes in Q3 vs Q2, activity levels are still meaningfully lower than 2021 and 2020. Capital markets continue to be cautious given macro-economic and geopolitical issues (inflation, energy crises and the Ukraine/Russia conflict)
  • Central banks have responded to spiralling inflation by increasing base rates, albeit at differing rates and arguably the ECB may yet have to continue to ‘catch up’ with the UK and US. Further increases are expected by ECB, however signalling from central banks suggests that the peak rates may be lower than anticipated just a few months ago
  • From H1 22, available borrowing terms and conditions have tightened materially vs. the start of the year. In particular, leverage levels have come down given the increased cost of debt, with lenders increasingly focused on debt service coverage ratios. Lenders and their ICs are increasingly scrutinising EBITDA adjustments, baskets and recession cases
  • Private markets deal count for Q3 was down 5% vs Q2, with 224 deals in total - predominantly acquisition-related financings. While the direct lending community is still occasionally taking advantage of slower public market activity, this is expected to slow given the pace of deployment of many asset managers through this period, and tentative signs of life in the single B rated market

2023 Outlook

  • The current market conditions are unprecedented with so many variable (and often counterintuitive) indicators for lenders to triangulate
  • While 2022 has undoubtedly been a challenging market for borrowers to navigate, there are grounds for (cautious) optimism for 2023. With a trickle of large deals clearing (albeit at elevated economics) the markets seem to be adjusting to new issuance conditions, with asset managers identifying attractive deployment opportunities that borrowers are willing to accept. Green shoots of activity are visible as we enter the next calendar year
  • Nonetheless, we do not expect a full return to 2021 levels, and market conditions will likely remain difficult. We anticipate:
    • An increased focus from lenders on resilient, high-margin businesses (eg tech and tech-enabled)
    • Investors (both debt and equity) deploying capital, albeit at a slower pace
    • Large numbers of portfolio add-ons, and bilateral processes
    • An increase in A&Es to manage impending maturities
    • The quantum and terms of available acquisition debt will likely impact overall valuations, wider M&A market’s bid/ask spread and potentially elongate processes
    • The early engagement of lenders will likely be key to navigate the ‘new normal’ in pricing and access to capital

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[i] LCD European Quarterly Third Quarter 2022 - Leveraged Commentary & Data | PitchBook

[ii] LCD European Quarterly Third Quarter 2022 - Leveraged Commentary & Data | PitchBook

*Unless otherwise indicated, all tables, data and statistics provided in this piece, including with respect to deal activity, have been collected via the October 2022 DC Advisory Lender Survey, subject to the limitations of the Survey; please see note (5) in this link, for more details 

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