European mid-market lending activity was strong through the first quarter of 2020 but is expected to contract sharply during Q2, according to investment bank GCA Altium.
In its latest mid-cap monitor, the debt advisory firm reported continued growth in transactions across Europe’s main economies during Q1 as coronavirus first arrived on European shores.
Germany saw 22 deals during the first quarter and transaction numbers in line with levels seen in recent years. The total capital loaned and average deal size reached its highest level since Q2 2017, though this was driven by two very large transactions both more than €250 million.
GCA Altium said German activity was strong through January and February ahead of the introduction of severe movement restrictions in March to try and stem the transmission of covid-19. However, since the shutdown was introduced, new dealflow has been limited and lenders and sponsors have shifted their focus to protecting the value of existing investments, leading GCA Altium to predict activity in Q2 will be dampened.
Similar trends are seen elsewhere. In the UK, 40 deals were completed in Q1, which was lower than the 51 seen in Q1 2019 but above the 34 closed in Q4 2019. Again, it is expected that Q2 activity will be depressed due to the coronavirus emergency measures. While banks and funds say they are open for new investments, it is likely deals in Q2 will only complete if they have been able to continue trading strongly through the crisis.
France saw 36 deals complete in Q1, down from 43 in Q4 2019 but above the 33 completed in the first quarter of last year. Banks continue to be major players in French lending and 57 percent of deals in the year to March 2020 were completed by banks, compared to 43 percent in the UK and 36 percent in Germany.
For alternative lenders, Q1 2020 was one of the busiest quarters recorded by GCA Altium with more unitranche than senior loans completed in both the UK and Germany. However, some jurisdictions saw no activity, notably Spain and Italy which were both hit relatively early and harshly by coronavirus.
Debt funds have increased their pricing as a result of the risk and uncertainty stemming from covid-19. However, such premiums are highly dependent on the situation affecting the underlying assets, with some particularly attractive companies able to continue to receiving financing priced in line with pre-corona loans.