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The origination pipeline for €5m-€50m EBITDA companies in Europe is under attack. Upper-middle market private credit funds are ‘dipping down’ into smaller deals, with a cavalry of bank clubs competing at this size with renewed confidence, complained 9fin sources this week.

Competition from the broadly syndicated loan (BSL) market in deals of €80m EBITDA and above is forcing upper middle market private credit funds to hunt smaller fry in the middle and lower mid-market — with consequences for deal terms and pricing.

“This is pricing and terms on which we can’t compete and that we would say is not suitable for companies of this size,” said one source. They cited a recent pitch from an upper middle market private credit fund offering Euribor+575bps pricing on an €8m EBITDA business. “Sponsors are of course accepting this,” added the source. 

Terms such as covenant-loose or covenant-lite are making their way down into this pool, as well as leverage levels above what would normally be offered at this size. Average level on deals below €50m EBITDA in Q3 2023, was, according to 9fin research, 3.4x but pitches are now going way higher than this.

At least two upper middle market funds who recently (January 2024) closed deals in the lower middle market were cited as culprits. 

The question is whether this is a temporary phenomenon while the larger funds wait for M&A to pick up, or more of a structural change. 

Repricings in the BSL market, a recent example being French biometrics specialist Idemia’s approach to the marketon its $750m 2028 TLB, are turning the heads of sponsors currently wondering if they’ve got the best deal with private credit.

At least two large-cap unitranches were taken out this week with TLBs from the BSL market, according to a second9fin source — watch this space while we firm up those names — and several private credit funds are proactively repricing their debt to compete with any eventual BSL pitches. Again, more to come on private credit repricings from 9fin.

Meanwhile, the sheer volume of dry powder in private credit may just, finally, be pushing the pricing on the asset class down. Prior to the E+575bps pitch on the €8m EBITDA deal cited, the smallest deal to get away with a five handle pricing in the past 12 months was Finnish financial software business, Nomentia, which received an E+575bps unitranche based off €14m EBITDA. To illustrate the rarity, the biggest after that was French engineering software business, Sogelink, with €50m EBITDA. 

And if large funds encroaching on lower middle market territory was not enough, back bounce the bank clubs. Their aggression varies in intensity from country to country, with Belgium allegedly being the worst, but few territories lack a story of a bank club win on what would otherwise have been a private credit deal.

In Belgium, a hotly anticipated sale of group of digital consultancy brands is now very likely to have gone to the banks. “Belgian banks were offering highly competitive terms,” said the first 9fin source. 

Meanwhile, a recent Ardian acquisition was financed by a club of 14 banks despite strong private credit pitches. 

A large-cap problem too, with Nordic infrastructure business services group, Eleda, shortly coming to market with €800m of first lien loans to finance its buyout by Bain Capital, even though sponsors looking at the asset before Christmas were turning to private credit as first port of call.

Large-cap (around €100m EBITDA) M&A and refinancings occupy a far bigger slice of the European private credit pipeline than they did before Christmas, with roughly 17 of the approximately 60 (it gets added to as we speak) situations turned over to these deals.

Click here for the full named and detailed list of details, or subscribe to 9fin Private Credit by emailing subscriptions@9fin.com.

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