On an untypically sunny Autumn morning, Private Debt Investor and six industry veterans convened at ICG’s offices in London to discuss the changing face of the debt markets in Europe, and how they and their competitors are addressing the challenges – and more importantly opportunities – those changes have presented.
If it’s hard for most observers to make sense of the debt markets at present, it’s reassuring to hear that even experts are struggling to decipher them. As ICG’s Dagmar Kent-Kershaw understates: “The credit markets are in an interesting place at the moment”.
“If you think about the broader syndicated loans markets, there is a real shortage of new capital coming in. The banks have re-trenched, and it’s becoming increasingly hard for CLOs to make new investments. As a result, new assets are not coming to market,” she adds.
Yet CLO managers are desperate to hold onto their existing portfolio, she argues, citing The Carlyle Group’s recent dividend recapitalisation of the RAC where the structure was re-levered and CLOs stayed on board. “Existing CLOs are keen to stay in a good asset, and are prepared to accept quite aggressive terms to stay in there rather than lose that asset and repay it to investors,” Kent-Kershaw says.
Switching focus to the non-syndicated private debt markets, there’s significant interest from numerous parties – “From corporates who wish to borrow, from investors looking to come into the space, or asset managers who want to manage those sorts of assets… In the club-style transactions of the mid-market, that area of the market is functioning well and there are a number of players from all sectors who are getting involved,” she says.
KKR Asset Management’s Marc Ciancimino notes investors are chasing quality assets, and ignoring anything which falls short. “It’s a very bifurcated environment,” he says. “You see this across a lot of different asset classes, from real estate to leveraged loans. Investors are rushing to things which tick lots of boxes: good cashflow, good performance over the last five years, in a jurisdiction they like. Those deals can get done.”
But unwillingness to get involved in difficult situations or complex credits means a host of deals are failing to progress. “We’ve seen an amazing number of transactions which didn’t cross the line in the last 12 months. It’s a tale of two markets – capital has been rushing towards perceived high quality situations and as a result, leverage has been fairly elevated with terms that are pretty aggressive, whereas on the other hand you have deals that struggle to get done at all.”
Bayside Capital’s Appu Mundassery believes banks would rather refinance existing loans then issue new ones. “To be a little cynical, if there’s an excuse to roll into something and to not have to do new work, there’s a default option there, it’s the path of least resistance. We see that a lot in deals with less scale – they acquire almost an equity diligence aspect.”
That reluctance to back new deals means the lending landscape is changing as private debt funds step into the breach. Traditional banks account for a dwindling portion of acquisition finance, according to Partners Group’s Juri Jenkner.
“Over the last 10 years in the US, 57 percent of primary loan financing was provided by the banks themselves, and now it’s only 16 percent – the rest is institutional investors. Europe is following a similar trend – banks were responsible for 78 percent ten years ago and now it’s only 54 percent,” he says.
All participants agree the market is becoming more institutionalised as far as credit funds are concerned. Opinions differed though as to whether new entrants could fill the funding gap that’s appeared.
“We’re really in an evolutionary phase,” Ciancimino says, “and although we don’t have the luxury of knowing what will happen in the next two years, you can be certain that it will be different to what we’ve seen in the last two. It won’t be more of the same.
“There’s a bit of a stand-off – there’s this gigantic deleveraging required, but if you speak to the well-known high street banks, they’re happy to fund mid-market deals at LIBOR plus 450, whilst at the same time disposing of gigantic portfolios of previous deals. I think everybody’s trying to find their feet in this new environment.
“The direction of travel though is that there’s a huge requirement for capital over the next few years, and there is a dearth of supply. There are sponsors with a lot of equity still to invest. Our small portion of the market is tiny in comparison to the commercial real estate market, the sovereign market, all of these other markets where similar dynamics are playing out. The reality is the environment going forward is going to be different, with a different balance of power. It’s going to be an unpredictable route forward.”
On the panel
- Dagmar Kent-Kershaw, head of credit fund management at ICG, and a member of the firm’s investment committee. She joined ICG in 2008 after ten years at Prudential M&G as head of debt private placements, then head of structured products.
- Marc Ciancimino is a director at KKR Asset Management. He joined KKR in 2008 and has particular responsibility for the European activities of KKR Mezzanine Partners. Prior to KKR he was with GSC Group in their European mezzanine business where he was a managing director responsible for sourcing and evaluating middle and large market transactions.
- Sanjay Mistry is director of private equity fund of funds and of private debt at Mercer. Based in London in Mercer’s ‘Alternative Boutique’, he is involved in advising on the full range of private equity and private debt investment issues to institutional investors.
- Appu Mundassery is managing director of HIG affiliate Bayside Capital, based in London. Appu has over 15 years of experience in leveraged finance origination and credit investing, both in Europe and the US. Prior to joining Bayside, Appu was a partner and senior portfolio manager at Highland Capital Management Europe.
- Juri Jenkner is head of the private debt team at Partners Group. He is also a member of the private debt investment committee. Prior to joining Partners Group he worked for Privatbankiers Merck Finck & Co in Germany, first as equity analyst, then as corporate developer.
- Paul Rolles, chief executive of AgFE, has been involved in the European and International financial asset markets for more than 20 years. Prior to starting AgFe, Paul spent 15 years at Morgan Stanley where he started the European securitisation group and was later head of the bank’s European financial asset backed business.