Capital Structure Forum: European growth to be driven by bank retrenchment

European banks are expected to continue retrenching and opening up opportunities for private debt fund managers, according to panellists at Private Debt Investor’s Capital Structure Forum in London today.

The day opened with discussions on the current state of play in European private debt, with the growth of Germany, the growing role of the asset class and Brexit were the major topics of discussion.

Luis Mayans, head of private debt Europe at CDPQ, said: “Banks will continue to retrench and focus on their core products and industries, which will open up more opportunities for funds.”

He added that some deals which were previously deemed impossible for private debt funds have become possible in recent years as banks withdraw and fund sizes have increased.

Ben Harrild, partner at BlueBay Asset Management, agreed, saying: “We’re now seeing deal sizes of half a billion pounds being done and this comes alongside the growth of very large funds which have an appetite for larger deals.”

He said the high-yield bond market had typically been dominant in the large leveraged buyout space, but high yield bonds are subjected to the rapidly changing conditions of public markets, putting them at a disadvantage.

“The high yield market can’t deal with market volatility and is either open or shut depending on that volatility. Borrowers want certainty and lenders that can help the company grow consistently.”

The growth of mega funds targeting the larger end of the market has also created more space for firms targeting the lower mid-market segment, according to Stephan Caron, managing director at BlackRock.

“The €10 million to €30 million EBITDA market used to be one of the most competitive but as larger players have moved up it is less competitive today so it’s an attractive market that can offer stronger covenants for lenders,” he explained.

The UK’s departure from the EU is also expected to shake up markets, with one panellist saying it could open up even more good deals for alternative lenders.

Dominick Peasley, head of distribution at Funding Circle, said: “Brexit has actually benefitted us as it is leading to even more bank retrenchment, which is driving more business to us.”

He added that while regulatory pressures on banks are creating opportunities, less obvious issues such as the closure of bank branches, which would typically be a way for small businesses to build bank relationships, are also creating gaps in the market which alternative lenders can exploit to source more deals.

Caron highlighted the increasing interest in the German market as another key trend emerging in European private debt.

“The big star this year has been Germany, which is a market that has really come about in the last 12 months. About 40 percent of our deals are now in Germany and this helps us in developing a properly geographically diversified portfolio.

“We’re also seeing interesting developments in Southern Europe and Benelux. The Dutch banks are struggling with regulatory pressures.”