1. 2024 has been one of the strongest years on record so far for the leveraged loan market in Europe, even without interest rate cuts. What has changed in this year so far?

The volume of deals in the European loan market has been very strong in the first half of the year, pushed by similar macro conditions across the European jurisdictions. In our Q1 European market monitor, we noted that the first three months of 2024 have been the busiest in the BSL market since Q2 2021, with volumes increasing to €29.3bn, up 80% from Q4 2023 (€16.3bn) and 173% from Q1 2023 (€10.7bn).

There are three themes that created a prolific background for leveraged loans: 1) borrowers decided to address maturities regardless of the high interest rates; 2) credit spreads tightened considerably; 3) private equity firms started deploying the dry powder they've accumulated in the last two years.  

2. Looking at the different use of proceeds, refinancing transactions still account for the majority of the volumes, whereas buyout financing slightly picked up but only in small size deals. Is this a sponsor problem?

The M&A market hasn’t picked up as expected and it will take more time for a full recovery as the bid/ask spread on valuations is still wide.

Despite the long-awaited increase in M&A activity, the European M&A deal value in Q1 2024 was down 12.1% from Q1 2023, but the shift towards the syndicated market meant that buyouts and other M&A activity, accounting for €5.2bn of institutional loan volumes in Q1 2024, was up 10.7% on €4.7bn in Q1 2023 and up 30.8% on €4.0bn in Q4 2023.

Low M&A volumes combined with successful fundraising from CLOs and the resultant pressure to deploy, has created a window for opportunistic repricing of European leveraged credit. Also, more refinancings came as sale processes didn’t go through, forcing the sponsors to address incumbent debt maturities.

3. Do you believe in a steady recovery of the M&A activity and LBOs?  

We expect M&A activity to come back strongly and LBOs to be the key component again.

At the moment, as we said, refis account for the majority of transactions in the primary market but we don't think this can be linked to a structural trend as it’s more contingent and this trend will reverse. As we pointed out in our M&A outlook for 2024 ‘The Power of the Stirring Bear’, the full recovery of buyouts will be driven by the sponsors’ cycle of life as they need to fundraise, invest and sell in order to survive and give returns to their LPs.

The market will be driven by investors who do need to execute M&A to source opportunities and realise returns, and we believe this will truncate the period of hibernation and drive the activity in the next months. By 2025, the bear (as private equity) will have left the cave, and the deal-making will be powered by a significant backlog of assets that have to be sold.

4. Moving on the legal front, have you seen any particular changes in documentation and do investors want more safety nets?

We haven’t seen any particular trend on the legal front that can be compared to what we’ve seen in 2015/16 with the covenant-lite trend. There’s sufficient liquidity in the market and transactions get done with standard documentation. Any meaningful doc change is credit-related and not part of a structural trend on documentation. Restructuring processes are also moving forward in a standardised way.

5. Syndicated markets have regained momentum this year and borrowers are again asking for traditional forms of financing, but are we still living in the so-called ‘golden age’ of private credit?   

Direct lending has developed significantly post-Covid, as the absence of a functioning syndicated market in 2023 allowed private credit lenders to move up the size spectrum.

Private lenders have to react by offering improved pricing and terms. Increased flexibility being offered by private credit lenders includes PIK-toggles, an increased use of delayed draw terms loans and large uncommitted accordions.

However, the syndicated market’s return is also likely to drive a reversion to the mean for private credit lenders in 2024 with a greater level of activity for companies with EBITDA less than €50m.

One of the drivers for direct lenders in Europe has been the rise in the Euribor rates that tightened the spread between banks and direct lenders. In the zero interest rate environment we had up to three years ago, private credit doubled the cost of traditional lending, whereas now the difference is about 200 basis points depending on the credit, so that private lenders have become significantly more competitive on a relative basis. Private debt funds can offer a better and more efficient service to companies, it’s an unstoppable force.

6. Private credit has entered the syndicated space in various forms of financing, how do you think this will play out in the future?

Private credit has taken market share from the syndicated loan market, giving borrowers hybrid debt structures with senior debt syndicated to banks and junior capital handed over to private lenders.

In Italy, we had the example of Officine Maccafferi, an Ambienta SGR portfolio company that backed the takeover with Pemberton financing the subordinated tranche and six banks in the TLA. We’ll see more of these hybrid structures in the coming months, especially in large cap companies.

7. As vice chairman of DC Advisory in Italy, have you seen any peculiarities in the local market? 

Italy is not different from other European countries, and it reported a strong flow of loans. In our debt market monitor we write that the Italian M&A activity has started 2024 in a very strong position, despite a small decrease in deal volume, with recorded deal value reaching €14.6bn, a 55% increase in deal value vs Q1 2023. Interestingly, we observed the opposite trend in our previous edition when comparing 2023 and 2022 deal volume and value.

8. Has the role of private credit in Italy been the same as in Europe?

Direct lenders have had a huge impact in the Italian market as they’ve had elsewhere in Europe, but possibly with less intensity compared to the UK where the direct lending started.

Macro conditions don’t have a specific jurisdiction, but Italian banking has a peculiarity that is giving private funds more opportunities in the small-mid market, which is at the heart of the industrial production in the country.

After the regional banking crisis and the failure of important banks we’ve seen a strong consolidation in the sector leaving few players available, hence less traditional borrowing opportunities for companies. This created an opportunity for private funds to step in and provide the right alternatives efficiently.

9. What’s the main pushback for the loan market in the country?

The Italian BSL market is lagging behind the European peers on comparable terms, as the Italian market provides for some limitations in the syndication process.

Sponsors need to find alternative ways to finance their companies, via bonds, bank-club deals and other tranches. Leaving aside the structural economic issues that permeate the country, this is an important flaw in our financial system.