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Private Credit 

Alessia Pirolo

Welcome to Taking the Credit, 9fin’s weekly observations on the issues affecting the European private credit market. Find out more about what we do for private credit.

It was a rollercoaster week for the liquid credit markets, after Japan’s central bank sent shockwaves through risk assets and dashed hopes of a quiet August.

As traders scrambled to unwind bets that markets would be calm over the summer, the risk of moral hazard came back into the spotlight for central banks. Although case for credit is still strong, issuers thought twice about tapping the syndicated markets.

It was a good opportunity for private credit firms to show off one of their strengths — certainty of execution. And it worked, with a £1.75bn financing for the LBO of Hargreaves Lansdown that represents a comeback for private credit firms in the take-private arena.

On Friday morning, Hargreaves Lansdown announced it had accepted a £5.4bn takeover offer from a consortium of private equity firms including CVC Capital Partners, Nordic Capital and a subsidiary of Abu Dhabi Investment Authority.

The valuation represents a 54.1% premium from from the company’s share price on 11 April 2024 — the last business day before the consortium's initially approached the board with an offer.

The £1.75bn interim term loan backing the deal is underwritten by a lender group including Apollo, KKR, Blackstoneand HPS. The loan will be structured as a unitranche, priced at SOFR+550bps with a 98 OID.

Indeed, of the six sponsor-backed offers for UK-listed companies in 2024, three have tapped syndicated markets for the debt, two have been all-equity, and only one has called on private credit for financing, according to a 9fin’s recent analysis.

Last year the trend was the complete opposite: all but one of the 14 take-privates in 2023 turned to direct lenders.

So far this year, Bridgepoint’s £626m bid to take over financial consultancy firm Alpha FMC is the only UK take-private to call on direct lenders.

There’s been plenty of discussion in recent months about the so-called golden age of private credit losing its luster. But then again, hype can only last for so long. As we observed in our H1 24 European Private Credit Review (which includes league tables — please get in touch if you want to submit your firm’s data!) private credit seems to be entering a more mature and reliable phase.

According to Preqin’s Private Capital Performance Pulse, private debt performance has been consistently strong since 2022. The asset class has significantly outperformed high yield and leveraged loan indices:

Of course, a lot of this is down to higher interest rates — ironically, the very thing that the public markets spent most of this week complaining about.

“An upward trend in net IRR is visible, reflecting the benefits of rising interest rates alongside strong economic performance in key markets such as the US, and the absence of significant downturns in European economies,” said Preqin in its report.

It’s often suggested that private credit is simply in the right place at the right time, and that the market’s ability to ‘amend and pretend’ helps to hide distress. There may be something to that, but there’s evidence that this rates-driven outperformance is coupled with an improving credit picture.

Here’s a quote from Scope Ratings, which has provided 70 private private credit ratings in total over the last two years with an aggregated exposure of more than €5.6bn:

“While the average credit profile of covered entities has deteriorated over the last 24 months, the picture is improving […] the erosion of credit quality has bottomed out in light of interest-rate tapering and easing concerns about economic growth…”

So there you go: the very thing equity traders were scared by this week (the possibility that central banks would continue tapering monetary policy) has…actually helped to improve the outlook for private credit?

But there’s a kicker, which addresses the inevitable question of how private credit borrowers have been able to survive the squeeze of higher interest rates. It’s basically a fancy way of saying ‘amend and pretend’:

“…while higher default risk can be mitigated by an array of measures provided by equity sponsors and direct lenders.”

Private credit: resilient to market volatility and higher interest rates. So long as sponsors and lenders have enough dry powder to weather the storm.

Speaking of which, our reporting shows that private credit continue to search high and low for opportunities to deploy capital, even through the traditionally slower summer months.

US-headquartered direct lender Blue Owl is financing Cinven's acquisition of a majority stake in Swedish health beverage firm Vitamin Well, a deal that valued the company at €3bn.

Direct lenders are also expected to provide a £500m loan for the LBO of UK manufacturer Aspen Pumps. Sponsor Inflexion has mandated William Blair to run an auction; the firm has EBITDA of between £60m and £70m and could trade for around £1bn, according to our sources.

Then there is Vitruvian’s acquisition of IT services provider Options Technology from Abry Partners. The firm’s EBITDA is around €70m, and the expected valuation is around €840m.

All in all, it is shaping up to be a busy autumn. Other sale processes are set to heat up in September: Five Arrows is marketing healthcare software firm Softway Medical off around €40m-€50m of EBITDA, and Avedon Capital is looking to exit waste solutions business Waste Vision, which has around €11m of EBITDA.

For our full list of deals in the market, click here. And if you’re a fan of this newsletter but aren’t yet a subscriber, email subscriptions@9fin.com for a trial.

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