European Debt Outlook 

2022 Overview

  • The European liquid debt markets struggled in 2022 as the markets faced challenges from the Ukraine / Russia conflict, double digit inflation and increasing base rates. With full underwriting books before these challenges, the capacity to write new deals was severely impacted and so overall debt volumes for the year were left at their lowest for a decade [i]
  • In the mid-market, deal volumes also contracted in 2022, most notably in the UK and France, reflecting lower overall M&A volumes. Whilst refinancing activity continued (including some maturity management), total issuance in the last quarter was down 21% vs Q3 (175 vs 222 issuances respectively), and down 25% vs Q4 2021 (234 issuances) [ii]

2023 Outlook

  • The European debt markets began 2023 with relative stability as energy prices started to fall and price increases slowed down, supporting our belief that inflation may have peaked in multiple jurisdictions
  • Given these leading economic indicators, market participants are now of the view that further increases to the base rates in Europe, the UK and the US are likely to be modest (albeit varying increases across each) [iii][iv]
  • We have witnessed the initial cohort of liquid names to market dominated by known issuers seeking maturity extensions and smaller taps to clean down RCFs, or to reduce bridge exposure, with these now clearing at mid to high-90 OID levels
  • Recovery in secondary markets has also continued, driven by increasing optimism around macro-economic data and improved CLO activity and pricing[v]
  • Although these observations are grounds for (cautious) optimism, it will likely take time for central banks to get inflation fully under control, and so interest rates and inflation should remain at elevated levels for the time being
  • We therefore expect refinancings, A&Es and covenant resets will very much remain the priority over the next two quarters as sponsors prioritise pushing out 2023-25 maturity requirements
  • However, given current pitch activity and improving sentiments in the debt markets we anticipate an increase in M&A led financing from mid-year onwards
  • We further anticipate private credit funds sharing deals in 2023 as portfolio managers seek to diversify risk and manage remaining fund capacity (both capital and time)

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References: 

[I] LCD Q4 2022 European Quarterly Wrap https://www.lcdcomps.com/lcd/r/index.html?rid=20

[II] DC Quarterly Debt Monitor (Q4 2022)

[III] Bank of England, Bank Rate Increased to 4% - February 2023: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/february-2023

[IV] European Central Bank, Economic Bulletin Issue 1, 2023: https://www.ecb.europa.eu/pub/economic-bulletin/html/index.en.html

[V] LCD European Weekly Wrap: https://www.lcdcomps.com/lcd/r/index.html?rid=20

[VI] The February 2023 DC Advisory Lender Survey - DC Advisory’s independent survey of 93 European banks and direct lenders. which was completed in January 2023 and conducted across UK, France, Germany, Austria, Switzerland, Spain, Belgium, Netherlands and Luxembourg (referred to herein as the “The February 2023 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.

 

*All data (unless otherwise stated) in the tables in this piece have been collected via the April 2022 DC Advisory Lender Survey, subject to the limitations of the Survey, please see note (1) for more details.