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Private Credit 

Josie Shillito

If there were jitters at IRIS Software’s £1.2-1.5bn debt stack disappearing from the European private credit market to a possible BSL financing in the US when the buyout went to Leonard Green on 23 December 2023, these have been firmly put to bed over Christmas.

Although the direction of IRIS’s debt financing remains unclear, sentiment for private credit opportunities in the large cap space is strong. 

“Compared to this time last year, our list is three times as full,” commented one private credit fund manager.

Meanwhile, Marc Preiser, private credit portfolio manager at Fidelity, said in a statement “The start of 2024 marks a highpoint for European direct lending with the pipeline of deals now the strongest since the market came of age.”

And this is not limited to the mid-market. According to a survey from software platform for private capital markets Termgrid, 82% believe that private credit can sustain competition in $1bn-plus size deals. 

According to the survey: an improved macroeconomic outlook, plenty of dry powder and the five-year investment cycles of private equity sponsors are seen driving the improved outlook for 2024.

However, according to 9fin sources, there is also the matter of CLO capacity. “For a BSL deal, you’re relying on a credit having previously been in the syndicated market for a long time — a good history, well-known, because there's not enough CLO capacity for this kind of thing,” said the first private credit manager. 

CLO issuance has held up but is not outpacing itself. European CLO issuance reached €27.8bn in 2023, of which €26.1bn was new issuance which equates to 94% of overall volumes. In 2022, total issuance was €32.1bn, according to 9fin’s structured credit team’s analysis. 

The traction of private credit over BSL in €1bn-plus deals will be tested by a pile of large-cap deals in 2024. A look at 9fin’s European private credit pipeline reveals 15 companies either in market or due to come to market off €50m EBITDA or more, with five of these, (including IRIS Software), marketed off €100m EBITDA or larger. 

Whether they meet the threshold of an excellent history in the BSL market is another thing. Out of the five identified, three have been or currently are recipients of syndicated loans. However, in the case of at least one, the syndicate does not want or have the capacity to take on all of the new debt proposed. 

A number of middle market closed deals from 9fin’s European private credit pipeline have gone to bank clubs, who, with the return of positive market sentiment, are making up for lost time.

This is true of debt supporting sales to both trade buyers and sponsors. In fact, 9fin sources have commented on the number of banks present at lender education meetings in the UK and across the continent, with Germany, Belgium and France standing out in particular. 

French engineering consultancy, Vulcain Ingénierie, recently closed a sub-€500m debt package to a club of banks in the senior, and private credit fund Eurazeo, in the junior. For full details, head to the pipeline. 

Given the appetite of banks — but capped, anecdotally, according to 9fin sources, at 3.5x leverage quantum, there’s a good opportunity for private credit in junior debt.

“Given the strong bank bid in France in particular, we see some appetite for another layer of capital, whether that’s second lien or a mezzanine facility,” said Preiser.

KKR’s Michael Small, consulted in 9fin’s junior lending analysis, and he observed that “market participants expect junior lending to return as a key component of buyouts when public markets return.”

Payment-in-kind is another instrument that simply will not go away. With direct lenders becoming increasingly conservative in the leverage they are willing to sign off on (averaging 3.7x in Q3), PIK debt can give borrowers an extra 1x to 1.5x of leverage on top of existing debts, as observed in the same analysis. 

Indeed, if UK public-to-privates in 2023 are a litmus test for deal structures in the market, there are very few deals without a PIK toggle. See the chart below, with the non-blurred version available to 9fin subscribers here. 

According to Alliance Bernstein, real estate could present a real opportunity for private credit in 2024.

“A wave of maturing loans held by banks who may be reluctant to extend them could create opportunities for private lenders who have remained patient and well-capitalised. As always, the risk-reward calculus varies by property type,” the investment manager said in its 2024 private credit outlook.

9fin has conducted its own analysis in this area, but flagged that returns (with five-year senior corporate real estate loan returns at 5%, versus senior private credit loans as high as 7.5%), drive deals towards the more challenging parts of the real estate market — such as value-add development projects. 

Equity, or preferred equity, on the other hand, is presenting some opportunities. With the rise of A/B structures in real estate loans, in which the loan is refinanced into a senior and subordinated structure with equity sitting between the two, private credit lenders are all too happy to provide equity, common or preferred, to fill in the gaps.

It’s early days of 2024, but the number of deals in 9fin’s European private credit pipeline is ticking up — with a broad variety of sectors outside of technology and healthcare trying their luck. 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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Taking the Credit — Private credit and BSL tug-of-war in 2024

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