On the bank/fund relationship:
Ken Goldsborough, managing director, Duff & Phelps
“In 2017 we’ll see a continued shift into non-bank lending in the remainder of Europe, particularly France and Germany. Europe is slowly moving towards the US model where non-bank lending makes up approximately 80 percent of the leveraged finance market.
I suspect we’ll see greater collaboration between banks and credit funds, with the former providing a revolving credit facility or ABL facilities at the front end, and the latter offering term lending. Banks will continue to provide ancillary business services, from swaps to payments and so on, and they will lend money, but at the safer end of the credit stack. Specialist lenders will take on the riskier part of the capital structure.
We may also see more hybrid deals between ABL and credit funds, where there’s a good marriage of interests. If you can raise €15–20 million on receivables from ABL at 1.5 percent interest and €30–40 million from a credit fund at 6 percent or 7 percent, the blended rate becomes quite competitive with bank financing.
Different types of lenders used to live in parallel universes but I think they are learning each other’s language. For borrowers, the challenge will not be a lack of access to funding in future, but finding the lender that speaks their language.”
On market dynamics:
David Allen, managing partner and CIO, AlbaCore Capital
“Over the course of next year, I expect that there will be one or two large moves in the market that could provide attractive investment opportunities. However, it will be important to remain patient in order to take advantage of these. The weak euro and pound will continue to drive M&A activity. This, combined with low interest rates and high stock market indexes, could see EV multiples remain high, possibly putting pressure on private equity funds as they look to win increasingly competitive auctions.
With all-in yields for European high yield bonds so low, the liquid market looks to be expensive, especially when compared to the US market, where yields are higher. It is also possible that this spread could widen as we move into 2017 on the back of Trump’s presidency. Better value may be gained in the private markets where complexity or illiquidity premiums can be substantially wider than the equivalent public market spreads.
I expect private lenders to complete larger and more complicated transactions with issuers, as Federal lending guidelines have created pockets for alternative lenders, especially for high-quality, high-multiple businesses. These often don’t fit the prescriptive ratios required by the Fed.”
On the macro outlook:
Paul de Rome, partner, EQT Credit
“The outlook for 2017 is positive for private debt providers. Smart investors in credit will be able to benefit from the uncertainty and volatility caused by the end of the multi-decade super-cycle for credit, asset prices, globalisation, demographics, and politics.
In a world characterised by too much debt, stagnant growth, high asset prices and a fragile banking system, the role of private debt providers is only becoming more important.
The main drivers of the coming year will be major political uncertainty, stemming from Brexit negotiations and the rise of populism across the world, and a growing divergence in Fed and ECB policy.
Overall, private debt providers have benefited from the European regulatory environment and we expect this to continue. New legislation being drafted, such as the ECB leverage limit guidelines and tighter CLO rules, should be positive for the industry.”
On debt market outlook:
Andrew Konopelski, head of credit, EQT Credit
“Risk levels in the European non-investment grade market are increasing, with less and less differentiation between assets. While we believe the market is primarily financing quality assets, it is becoming critical for managers to get the fundamentals right and be smart about their due diligence.”
On syndicated loans:
Andrew Konopelski, head of credit, EQT Credit
“The syndicated loan market remains attractive, despite pressure on pricing and terms, and we expect the high competition for quality assets to persist for both private equity and private debt firms.
The level of competition in syndicated loans means we are see increasing use of aggressive financing structures and creative adjustments to EBITDA being used to ‘sell’ leverage. However, we expect discipline to improve as supply and demand rebalances.”
On credit opportunities:
Cyril Tergiman, partner, EQT Credit
“Pressure on growth and aggressive capital structures suggest there is a credit cycle, which will be a significant opportunity for investors who have the experience and tool kit for managing stressed and distressed balance sheets.
While it is difficult to know exactly how the cycle will play out, we have already identified attractive opportunities in high-quality businesses in industries that are already undergoing change, or at the peak of their cycles and may find themselves unable to cope with their debt loads should performance dip.”
On direct lending:
Paul Johnson, partner, EQT Credit
“Direct lending remains a dynamic and growing market, with increasing acceptance of the product across the size spectrum and geographies in Europe. We are seeing US technology making small inroads, such as 1st/2nd loss deal structures.
The key issue for direct lending is asset selection, given the lack of ability to manage positions in secondary markets and the inherent risk in investing in smaller-sized companies. The most successful providers will be those that have private equity-style due diligence processes and real knowledge regarding the businesses they lend to.”