Loan Note: European leverage loan issuance tipped to rise; Goldman CIO’s view of alternatives

European leveraged loan issuance is expected to rise, but so too will the level of defaults; Goldman CIO Julian Salisbury speaks to PEI about the firm's plans for alternative assets; and positive sentiment around UK M&A improves. Here's today's brief for our valued subscribers only. 

They said it

“There is still much uncertainty around the UK economy post-Brexit, the cost-of-living crisis, and the growing level of industrial action in the country, and this has unnerved a few family offices and other professional investors”

Khalid Khan, managing director at Aeon Investments, commenting on the findings of a survey commissioned by Aeon that found family offices were cautious about the prospect of investing in the UK.

First look

Cracks in the system: Fitch predicts a rising default rate in European leveraged loans (Source: Getty)

Loan issuance, defaults tipped to rise in Europe
Having seen a huge decline last year, European leveraged loan issuance is forecast to increase in 2023, according to a report from Fitch Ratings.

The market hit an all-time high of more than €137 billion of issuance in 2021, but then plummeted to just over €77 billion last year. The expected rise comes as issuers adjust to new primary market terms and conditions.

But while the revival of the issuance market will be well received, the bad news is that defaults are also tipped to increase. From a high of 3.7 percent at the end of 2020, the default rate fell to 2.0 percent in December 2021, 1.4 percent in September 2022 and 1.2 percent at the end of last year.
However, Fitch expects the rate to rise to 4.5 percent in 2023.

The report says issuers that did not refinance in the buoyant market conditions of 2021 are facing maturities amid more challenging conditions in 2023 and 2024 with an increase in interest expense from rising benchmark policy rates and higher spreads in primary markets.

Loans that Fitch describes as “of market concern” – which shot up from 0.7 percent in December 2021 to 7.9 percent at the end of Q3 2022 – saw a small decrease to 7.1 percent at the end of last year.

Goldman’s alts divestments explained
PEI Group senior editor Adam Le had the pleasure of interviewing Julian Salisbury, chief investment officer of Goldman Sachs Asset & Wealth Management, on stage at the London School of Economics Alternative Investments Conference on Tuesday.

The interview was timely – just the previous day, various media outlets had reported that GSAM was shedding part of its $59 billion in alternatives exposure and replacing this with third-party capital – something Salisbury was quick to point out is part of a plan formulated and disclosed in 2020 around capital reduction.

“More and more of our clients [wanted] to invest with us and alongside us,” he said, adding that, at the time, Goldman didn’t have as many products to match client need. The capital intensity of using the balance sheet to make investments, during a time when regulation was becoming less predictable and more punitive, meant it was becoming harder to make long-term investment decisions with balance sheet capital – something the bank’s shareholders “weren’t really giving us any value for”, he said.

“In order to be competitive in the alternative landscape, you have to have larger pools of capital, you need to be able to show… that you can write large individual cheques and commit to deals,” he said.

If GSAM’s recent fundraises are anything to go by – it has raised at least $26.6 billion for buyouts, junior debt and a climate strategy in the last four months – it isn’t losing any time making headway on its plan. The firm will have news to share about its upcoming growth fund in the coming weeks, Salisbury added.

UK M&A down, but sentiment improving
A lack of debt financing is seen as a block to UK M&A activity regaining momentum, but signs of corporate willingness to do deals, coupled with the high level of private equity dry powder, means there is a cautiously optimistic view of activity levels for the year ahead.

Commenting on the latest findings from the firm’s Global M&A Trends report, PwC UK head of deals Lucy Stapleton said “the debt markets remain extremely difficult” for acquisition financing. However, according to PwC’s latest CEO Survey, 63 percent of UK company bosses said they did not plan to delay deals in the coming year.

“The mix of increased certainty, coupled with valuation recalibration, coupled with signs that inflation may have peaked and that interest rates could start to stabilise or rise in much smaller increments, mean this could be the catalyst for greater certainty in the deals market and for the big ticket activity in the UK to kickstart,” said Stapleton.

The Global M&A Trends report found that the UK saw a 16 percent decline in M&A deals between 2021 and 2022, with volumes declining by 17 percent. The value of deals dropped steeply as last year progressed, with £93.5 billion in the first six months and just £51.4 billion in the second.


Muzinich expands debt presence in Northern England
New York-headquartered debt investor Muzinich & Co has expanded its private debt team to increase its presence in Northern England.

Rob Judson joins the firm from Barclays’ Corporate Banking division, where he was a relationship director responsible for originating new business and supported the structure and execution of debt deals in the TMT sector.

He will join Muzinich’s UK private debt team and will focus on deals in the North of England.

Commenting on his appointment, Judson said: “I’m excited to be joining such an active and regionally focused lower middle-market private debt team. I’m looking forward to helping source and arrange growth financing opportunities, and in doing so support businesses in the North and beyond.”

Zurkow takes ACC reins from Fiertz
The Alternative Credit Council, a representative body for private credit fund managers and an affiliate of the Alternative Investment Management Association, has appointed Deborah Zurkow, global head of investments at Allianz Global Investors, as its new chair.

Zurkow assumes leadership of the ACC from Stuart Fiertz, co-founder and president of Cheyne Capital, who has chaired the ACC since its formation in 2016. Fiertz will remain on the ACC board.

“Against a challenging and uncertain economic backdrop, telling the story of the real-world impact that ACC members make through their funding is more important than ever,” said Zurkow.

Zurkow joined AllianzGI in 2012 as chief investment officer and head of infrastructure debt, leading a team that helped pioneer infrastructure debt as an asset class for institutional investors. Before joining AllianzGI, she was chief executive officer of Trifinium Advisors and head of public finance EMEA for MBIA UK Insurance.

UK lender teams up with BBB to support new homes
UK-based property asset manager LendInvest has announced a partnership with the British Business Bank to help finance smaller property developers providing more homes across the UK.

As senior funder, HSBC will provide up to £100 million (€113 million; $124 million), with the British Business Bank supporting the transaction via its government-backed ENABLE Guarantee programme.

LendInvest’s development finance scheme supports smaller property developers across the UK, helping to plug the gap in the delivery of homes and alleviate the undersupply of houses.

The ENABLE Guarantee programme is designed to encourage lenders to increase their advances to smaller businesses. Under an ENABLE Guarantee, the UK government takes on a portion of the risk on a portfolio of loans to smaller businesses, in return for a fee.

 LP watch

Institution: Baltimore City Fire and Police Employees’ Retirement System
Headquarters: Baltimore, US
AUM: $3.01 billion

Baltimore City Fire and Police Employees’ Retirement System has disbanded its entire investment committee, noting that, based on its current composition and utility, the committee was no longer necessary.

BCFPERS was created to provide retirement allowances and death benefits for the uniformed officers of the police and fire departments of Baltimore City. It is administered by the City of Baltimore Retirement System.

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Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal