• 2024 issuance is expected to stay at similar levels to 2023 according to investor and syndicate sources (€76.7bn for loans and €53bn for bonds) — with the hope of more new money deals versus refinancings in H2
• Despite better macro sentiment, it’s set to be another year of protecting the portfolio by being selective: building materials, chemicals, heavy industrials and labs stay on the naughty list. Healthcare and software remain preferred, while the higher cost of capital is expected to push more levfin names into stressed and distressed territory
• Private credit will continue challenging the syndicated market — especially for weaker credits and selected jumbo deals

Will Gareth Southgate finally win the Euros in Germany? Will there be a Trump sequel? Will Drake and Taylor Swift continue to dominate everyone’s Spotify Wrapped? 

All highly important questions we’re grappling with as we approach year-end.

We’ve also been asking our sources how they see European levfin markets shaping up in 2024 — on top of our usual 9fin recap pieces on loans and bonds.

2023 was dominated by A&Es across loans (55% of issuance) and refinancings across bonds (66% of issuance) but we didn’t see enough LBO/M&A activity — attributed to mismatched valuations causing auction processes to break down. 

Closing out the year, we’ve seen a Santa rally across assets as the “higher for longer” narrative fades away — opening the door to potential rate cuts across both sides of the Atlantic (albeit more delayed for the ECB vs the Fed).

This should translate into a much healthier deal-making environment — biased towards the second half of 2024. That said, investors are careful not to go overboard, remaining selective and protecting the portfolio given how quickly narratives can change. 2023 provides ample evidence to demonstrate the point.

JP Morgan’s research team, in their European Credit Outlook and Strategy report for 2024, expects bond issuance to increase substantially next year as 2025 maturities approach — paired with a drop in loan market activity as there’s been “greater progress that has already been made in terming out liabilities.”

As we’ve written before, over €60bn of bonds are set to mature in 2025, with the figure rising to over €100bn in 2026. A less significant wall looms for leveraged loans, with maturities becoming more pronounced in 2028 — evidence of the seven-year paper issued in 2021, and the 2025 to 2028 A&Es this year.

In EHY, JPM’s headline figure for 2024 is €80bn gross/€5bn net. For loans, it forecasts a more muted €55bn gross (including amend-and-extends) and €5bn net.

It projects some bond-for-loan refinancing given strong CLO demand as well as a greater preference for flexible floating rate liabilities in an environment when rates have most likely peaked.

The Loan Market Association (LMA) also surveyed its members for a 2024 loan market outlook, including last year’s answers for helpful context.

72.4% expect loan volumes to be at worst unchanged or to increase by more than 10% — comparing to last year at 53.5%. There’s also less pessimism — those expecting a decrease by more than 10% is down to 16% from 36.8%.

Source: Loan Market Association

“I think deals can get done in safer segments like software and healthcare — but that’s at the expense of chemicals, autos and heavy industrials,” one buysider told 9fin.

The LMA’s respondents see refinancings as the best opportunity in 2024 — at 44.2%. On the other hand, the expectation that restructurings will offer the best opportunities is down from 38.6% last year to 29.5% this year. 

After a weak year of corporate M&A, 2024 is expected to have a similar story according to the survey — ‘Corporate M&A’ at 10.4% versus 11.4% last year. Nevertheless, a pick-up is expected, weighted towards the second half.

“We’re expecting M&A activity to pick up next year but it won’t be a material jump out the gates,” one sellsider said. “The second half should see more deals — biased towards BB and quality single Bs. I see it being more noticeable on the EHY side considering ‘25 and ‘26 maturities.”

Source: Loan Market Association

This year saw just 9.9% and 8.6% of 2023 loan issuance for Acquisitions and LBOs respectively — highlighting a reluctance to engage in auction processes, which would crystallise lower valuations amid market volatility and a higher cost of capital.

That said, momentum appears to be shifting — with more LBO/M&A deals in the offing.

"We are the busiest we have been all year with transactions, actually feeling like things can get signed. Things are starting to feel more real than they have this whole year,” said Maria Andrisani, Head of Capital Markets Europe at Bain Capital.

A second buysider pointed to the expectation of lower rates in 2024 spurring the deal machine into action. At the time of writing, the overwhelming view is that rates have peaked: the median FOMC member now expecting 75bps of rate cuts in 2024 (with the ECB not too far behind).

Nevertheless, sources remain doubtful — specifically on valuation gaps being bridged.

“These sales won’t all happen but it looks better today than it has for some time,” a second sellsider said. “We could see some non-core sales as private equity loves those deals coming out of public companies. That could be an angle for more deals.”

The expectation for lower rates is also increasing investor appetite for EHY on a relative value basis vs loans — as evidenced by Synlab’s recent execution.

A sellsider pointed to strong demand for the seven year bond tranche in Synlab’s LBO financing, saying it was indicative of the shift that was taking place in the market from both investors and issuers.

“We’re now selectively pitching eight year deals to best-in-class names for 2024,” they added.

Not declaring victory just yet

Although 2024 is a year when a successful soft landing could be confirmed, for the pessimists, it’s when the much-anticipated recession of 2023 could finally rear its head — triggering more distress in levfin markets. 

This could involve a deterioration in credit quality, interest coverage and leverage ticking higher — these “creaks in the portfolio”, as the second sellsider put it, could be the constraining factor for investor appetite on new deals going forward.

JP Morgan notes that interest coverage ratios are slipping, from a peak of 6.8x at 3Q22 to 6x most recently. There’s also a very wide gap between BB coverage of 8.3x — which is above the average since 2015 of 7x — and single-B/CCC coverage at 4x and 3.1x, respectively.

Mitigating this, sponsors will remain focused on appropriate hedges for their portfolio companies (as they have been for years) — but those with hedges expiring come into greater focus.

"We’re not just encouraging rate hedging in our portfolio companies, we’re mandating it. We aim to have around 75% of floating exposure fixed and have been saying that since 2021 before any of these rate increases,” said Andrisani.

On the other hand, weak/expiring hedges in 2024 could spark a flurry of non-performing names approaching primary markets as they require additional funding.

A third sellsider said: “I think we’ll see a lot of hedges rolling off this year. If you’re a lower quality name, you’ve probably pulled your head in this year because on a relative value basis you might not have got priced [versus performing names]. I think we’ll see more poorly-performing issuers driving new money deals this year.”

As investors continue bolstering the portfolio, there are areas of the market that continue to be met with doubt.

“I think it continues to make sense trading up in quality — meaning that I remain cautious on building materials, chemicals, heavy industrials and labs,” said a third buysider.

A fourth buysider said: “We’re still going to be selective in 2024. Conditions won’t be as good as 2021 for a while but nevertheless we’re still set up for a really strong backdrop.”

“If defaults stay at expected levels, your coupons are more than sufficient. In EHY, 4-5% in defaults are expected at worst, but you’re probably making 8-9% so there’s meaningful profit there,” they added.

Just the two of us

And of course, no discussion of levfin would be complete without mention of direct lending — specifically its fierce competition with syndicating banks. 

Check out our 2023 data piece here but also keep an eye out for some 9fin Private Credit recap reports which will drop in January.

The first sellsider said: “We’re kidding ourselves if we think it’s going to change materially. I’m under the assumption that it will continue to grow in force. I think a peaceful co-existence is possible.”

But the type of deals going to direct lenders are often those the broadly syndicated market might pass over, anyway, three buysiders told 9fin.

“We’re shown deals that end up going to private credit and the truth is that the credit quality just isn’t up to scratch on a lot of those issuers,” said one CLO manager. “We reject them because they’re too levered, the cap stack is too racy, so we’re also looking at private credit lenders as taking on those weak B3, potentially CCC names that we don’t want crowding our market.”