With the spate of hung LBOs throughout the year and general market volatility, is risk appetite quashed?

• The spectre of a normalised rate environment as well as a slowdown in economic activity was certainly being factored-in at the start of the year, however I think the acceleration and exacerbation of these dynamics as a result of geopolitical events did catch the market off-guard.
• That said, I think it’s important not to entirely conflate the rapid and wholesale reprice of risk that has occurred at a macroeconomic level, with the quality of underlying convictions at a microeconomic level.
• And while at times in H1 it felt like risk appetite and the market technical was almost indiscriminately dysfunctional, I think it is clear that credit selection has prevailed as the paramount determinant of outcomes.
• So no, I don’t think risk appetite is quashed, though I do believe that performance and correspondingly appetite and terms will continue to disperse, at least until the consensus is that we have inflected and that peak rates, inflation and contraction are firmly behind us.
• Anyone in a seat with capital allocation responsibilities will have to be very well-attuned to that.

2.       What’s the availability of financing for new LBOs? What do you expect from forward M&A for the rest of the year?    

• From a balance sheet capacity perspective, availability of financing is improving — lots of progress has been made around de-risking prior to the summer break.
• Dispersion and technicals will have to be navigated in the context of recycling that capacity, however I do believe that the ability to put parameters around risk and therefore price it will improve — across the spectrum — as the extent of central bank actions becomes clear, the impact of these actions on inflation and demand is observable, and reporting cycles continue to shed light on idiosyncratic performance.
• M&A in EMEA has thus far shown resilience. The $808bn announced through to July 22 ranks as the third busiest year since 2010 and is only c. 20% down from the equivalent period last year. Going forward we expect corporates to continue to push strategic M&A agendas whether via carve-outs, spins, or minority/co-control sales. Sponsors by contrast are expected to pace their activity notwithstanding the dry power available to them.

3.       How much of the upcoming pipeline will be siphoned off to TLA, private debt and USD markets?

• Based on what is visible to us, the Street-wide committed pipeline in Europe coming in to September was slightly above €20bn across all formats.
• True bank distributions account for approximately half of that total and we anticipate that a further €3-4bn could pivot fully or partially in to private credit strategies.
• That leaves around €8-9bn of true institutional syndicated supply (including transactions currently in market) which is less than half of the corresponding amount we had at the September 2021 restart.

4.       Did the pipeline picture change following Jackson Hole? What’s the strategy now for deals with a lot of hair on them?

• Not materially as the committed pipeline in Europe is heavily skewed towards floating-rate and so less sensitive than the bond markets to shifting duration risk.
• We see greater fixed-rate supply waiting in the wings on a non-committed basis and indeed we are already starting to see a few issuers breach the surface — I expect more of that particularly if primary breaks well and holds through unhelpful tape.
• Real money accounts are still sitting on above-average levels of cash and with Q3 thus far being a positive return quarter for European high yield, the cost of remaining under-invested is starting to creep higher.
• Deals with “hair” on them tend to be highly situational, so at the risk of sounding generic I would say the following: try not to over-extend whether in relation to size or tenor or in any one format or currency — sometimes thinking sequentially and chipping-away at a large problem is the most effective path. Creative structuring can unlock a solution that would not otherwise be available. And where relevant, it is important to proactively engage a captive investor base as it will always be more responsive on a “self-help” basis.

5.       Do you think the buyside will be disappointed with the level of euro-denominated syndicated loan supply coming in H2?

• If I had to pick a base case I would say yes, certainly on the sponsor event-driven front. Not because there isn’t a lot currently in process or being assessed, but given valuation gaps between buyers and sellers are persisting and now being compounded by rising financing costs, there is always a risk that many of these go on hold or simply fall by the wayside. And even for those that do make it through, the typical lead time for M&A financing doesn’t bode well for a fresh wave of supply in the very near term.

6.       How do you view the rise of direct lenders in the syndicated loans market?

• I believe the maturation of the private credit industry is a good thing.  One consequence of that is a growing number of managers willing to take a fluid, more commercial, but still value-oriented approach to deployment – though in practice some are much better at it than others.
• The traditional private credit pitch to LPs is that the asset class delivers a persistent risk-adjusted premium to liquid credit and I think many managers are coming around — rightly in my opinion — to the view that the syndicated markets can often be a source of superior relative value, with the all the technical benefits of a large, liquid complex.
• I don’t ascribe to the view that this evolution in the application of private strategies will displace the syndicated markets. As scaled as some of the platforms have become, we have seen their deployment limits on display in H1. That all being said, as an uncorrelated source of liquidity I view the asset class as a helpful addition to the scene.

7.       In the rest of the year, where do you expect sponsor-backed issuers to be leaning? Loans, bonds, fixed, floating? And how do you expect documentations to move alongside?

• All things being equal, sponsors will tend to gravitate towards and exhaust pre-payable options before considering other formats.
• However given lagging liquidity in the European TLB market, the size of the aggregate debt raise is currently the overriding consideration.
• As it stands, and without a large bank bid, I think a new money institutional LBO financing of more than €500-600m will likely require a bond component or the ability to incorporate a dollar term loan if preservation of pre-payability is a priority.
• In terms of documentation, there has clearly been some moderation since the start of the year.  But again, I expect the dispersion in credit to filter through to what is achievable on documentation as well.

8.       How supportive have sponsors been in helping arrangers clear their backlog?

• In our experience most sponsors have been very constructive, not only in helping get the immediate financing across the line, but also with a view to preserving high quality access to the capital markets through the life of their investment.
• It is incumbent upon underwriters though, to be proactive and exhaustive in demonstrating the need for any concessions outside of contractual flex.

9.       What are the main differences in approach underwriting a deal at a large bank vs a private credit fund?

• That’s an interesting question and having spent equal portions of the last 10 years of my career in both a private credit fund and now a capital markets desk, it is one that I have thought a lot about.
• I think the old adage that banks are in the “moving” business, while funds are in the “storage” business is a good one, but it is incomplete. It seems to imply that underwriters can afford to take a shorter-term view on credit than end-investors can, because by definition the latter has to “live with” the exposure.
• I actually believe that for underwriters to be any good at moving risk, they have to be accurate proxies for those whose job it is to take and hold that risk.
• In fact I would go one step further and say that in my current seat the robustness with which we formulate an underwriting thesis has to be sufficient to not only win-over a single investment committee, but many dozens of investment committees each with their own unique experiences, processes, thematic biases and capital/return frameworks.
• And increasingly our thinking has to be sufficiently expansive so as to encompass and stand-up to a private diligence and investment process.