The European private debt deal market staged a comeback in the fourth quarter of last year, according to the latest research from investment bank GCA Altium. Much of the increased deal volume was refinancing and add-on finance, suggesting some firms are needing to reshape their capital structures (whether for better or worse) and others are perhaps looking for support for growth and consolidation.
In an echo of the global financial crisis, at least some of the explanation appears to be provided by bank retrenchment. While banks’ balance sheets are in better shape than they were in the aftermath of the GFC, a similar-sized gap is opening in the respective ability of banks and non-banks to make loans. GCA Altium found that, in the UK unitranche market, debt funds were claiming a whopping 78 percent market share by the end of last year – suggesting the banks were significantly hampered in their new lending activities.
Heading into 2021, GCA Altium noted that non-bank lenders’ views of the deal market were remaining positive. Many were claiming strong deal pipelines and looking forward to the easing of covid-related restrictions.
Things didn’t look so bright in the second quarter of last year, when the pandemic was beginning to tighten its grip. One market source told us that back then at least a quarter of European direct lenders had shut their door to new loans – lacking the bandwidth to do new deals even if they’d had the confidence to carry on as normal.
What transpired was a general willingness on the part of private equity sponsors to stand by portfolio companies and provide them with whatever financial assistance was required. Both private equity firms and direct lenders formed the view that difficulties faced by businesses would be temporary and that their trading environment would soon improve.
This no doubt remains the case, although hopes of a swift return to normal have been complicated by the emergence of new and more troublesome variants of coronavirus, as well as the slow rollout of vaccination programmes in some parts of the world. It remains to be seen how long sponsors will continue to be supportive of companies should the wait for improved conditions become a frustratingly prolonged one.
However long it takes to get through the crisis, fund managers say that, when we do, they will have a better appreciation of how to structure deals in future. Having seen how certain types of business have responded to the circumstances of the last year, there is a belief that covenants and various aspects of deal documentation can be more carefully tailored to a given borrower. As the deal market picks up, this will be getting close attention.
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