From the latest edition of Varde Views: Private Credit Opportunities in the Wake of Tighter US Banking Regulations

First look

Dealflow depressed in Europe
European debt financings had a weak second quarter, according to Houlihan Lokey’s MidCap Monitor for Q2 2023.

The survey found unitranche activity falling to 60 transactions, compared with 85 in the first quarter – a 29 percent decrease which was attributed to macroeconomic and geopolitical headwinds depressing the M&A market.

There was some cause for optimism as the UK – traditionally Europe’s largest private debt market – saw a 12 percent increase in transactions. But elsewhere it was a case of declining volume as Germany, France, Benelux and Spain saw falls of 59 percent, 44 percent, 43 percent and 18 percent respectively.

“A significant increase in transaction activity will only occur when M&A deal flow returns to the market,” said Norbert Schmitz, managing director in Houlihan Lokey’s Capital Markets Group.

Add-on acquisitions continued to be the main driver of financings in Q2 in the UK, France, Spain and Benelux as direct lenders remained more focused on existing portfolio assets rather than new transactions. The exception was Germany where add-ons tumbled to 12 percent of all activity compared with 46 percent in Q1 – but this was based on much lower deal volume overall.

The refinancing red flag 
The refinancing problem in European real estate debt is highlighted by a survey from AEW showing that a funding gap exists of some €93 billion.

The real estate and asset manager said the figure comes from measuring the shortfall between the amount of secured commercial real estate debt that was originated between 2018 and 2021 and the amount available for refinancing when loans reach maturity between 2023 and 2026 in France, Germany, Italy, the Netherlands, Spain and the UK.

“Declining collateral values and lower LTVs in a higher interest rate environment are likely to trigger significant refinancing challenges,” said Hans Vrensen, managing director and head of research & strategy Europe at AEW.

AEW noted that it was a “surprise” that the UK and Italy came out with a below-average funding gap. France, meanwhile, had the largest gap at an estimated €19 billion.

In an update regarding the overall market, AEW said debt financing used to fund new acquisitions had fallen 16 percent to €142 billion between 2021 and 2022 due to the interest rate increases suppressing demand for debt. Acquisition LTVs reduced over the same period from 50 percent to 47 percent – with a further reduction expected in 2023.

We’re in New York
It’s the place to be anyway, of course, but even more so this week as the private debt world congregates in the Big Apple for Private Debt Investor’s New York Forum 2023 at the Marriott Marquis.

So many highlights to choose from. On day one tomorrow we have a keynote interview with Golub Capital’s Spyro Alexopoulos followed by timely panels focused on areas such as distressed and special situations, speciality finance and a comparison of public and private market opportunities.

Day two on Thursday brings a reflection on the last decade of private credit (coinciding with our own 10-year anniversary) as well as our investor network, a dive into developments in the M&A market and the “World view of an Economist” with Blackstone’s Joseph Zidle.

PDI will be there, bringing you news and insights from the event in this column as well as in our other online and offline coverage.

Essentials