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Private Credit 

Fabian Graber

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’s been a week of superlatives, at both ends of the bottom line spectrum. US-based sponsor CD&R is closing in on one of the largest private equity deals in Europe, with the €16bn takeover of Sanofi’s French consumer healthcare business dubbed Opella. Meanwhile, a consortium centred around EQT agreed to buyinternational schools operator Nord Anglia Education for around €13.4bn.

Talking about billions: US plane maker Boeing this week reported a net loss of $6.2bn (€5.7bn) for the third quarter 2024 amid a strike and a quality crisis, which by the way was only its second-largest quarterly loss so far. Move the decimal point along to the right and you could point out that insurer AIG once posted a $62bn (€57.4bn today) quarterly loss for the final three months of 2008, but that wasn’t really a harbinger of great times.

So, back to the good news. And what does the surge in jumbo-buyouts mean for private credit in Europe?

It goes without saying that direct lending firms are getting a piece of the action in most of the recent large-cap deals across Europe. There is more to come: overall, PE deal volume in Europe this year is projected to increase by almost a third compared to 2023, with an expected 11.5% surge in deal count, according to a report by PitchBook. Private equity executives now expect even bigger private equity buyouts in Europe and more of them going forward, as per a report by Reuters.

“It’s becoming crazier and crazier right now. There are not many good deals for private credit out there at the moment, but if there is a deal that looks promising, everybody is all over it and it’s all happening at once,” said a lawyer to 9fin.

In the case of Opella, private credit providers including Goldman Sachs are lining up a circa €1.2bn HoldCo PIK on top a roughly €7.6bn debt package to back CD&R’s acquisition of a 50% controlling stake in the business.

Goldman Sachs is also leading a club of direct lenders that is in advanced talks to provide a more than €1bn PIK tranche for the takeover of Nord Anglia, according to a LinkedIn post by Debtwire. And generally, PIK is the flavour of the day in Europe, with cash-strapped sponsors opting to load PIK debt onto their portfolio companies, as reported by 9fin.

Already before Opella and Anglia, recent mega deals like DSV’s buyout of DB Schenker in Germany and ITP Aero’s refinancing in Spain both featured sizeable PIK facilities, as reported.

The takeover by private equity firms TPG and GIC of German energy metering business Techem for around €6.7bn, GTCR’s potential acquisition of generic drugmaker Stada for around €10bn and buyout plans for listed German IT business Nagarro with around €135m EBITDA could also see private credit firms providing some of the debt used to finance those deals.

Recently, it’s been carve-outs that have driven large-cap deal activity. At least, that’s the case for Opella, DB Schenker and German electric motors and drives manufacturer Innomotics, a carve-out from Siemens.

As interest rates spiked last year and economies came under strain, corporates increasingly started looking to secure cash by selling parts of their businesses, which materialised in a surge of those deals recently. And because of their complexity, carve-outs are an obvious opportunity for private credit.

A word of caution, though. We gave an example earlier this month on how fragile the relationship can be between the entity being carved out and its former parent after Windham filed a lawsuit against Awaze(which was carved out in 2018).

As private credit grows bigger, regulators in the US and in Europe are also increasingly scrutinising the space. This week, representatives from the US Securities & Exchange Commission, the European Central Bank and the International Monetary Fund flagged valuation risks in private credit and voiced concerns about the increasing involvement of insurance companies in the space, according to media reports on a Bloomberg event in New York on Tuesday.

That’s against the backdrop of some private credit firms in Europe, including HIG Whitehorse’s European operation, struggling to raise new capital. Overall fundraising has fallen off a cliff this year, with only around €15bn raised by mid-year, lagging the more than €50bn across the whole of 2023, according to Preqin’s Alternatives in Europe 2024 report. Private credit is also starting to show obvious cracks, as some debt fund-financed companies come under pressure and debt restructurings are on the rise in Europe and in the US.

However, for the US market, there are signs of improvement, as the overall default rate in private credit decreased to 1.95% in Q3 24 from 2.71% in Q2 24, according to a statement by law firm Proskauer.

Deal flow has not been limited to the large-cap space — there has been strong private credit activity in Europe across the board this week.

Colesco Capital has provided a debt package to finance Gilde Equity Management’s acquisition of Dunlop Protective Footwear, committing a €110m unitranche towards the buyout, levered at 4.4x off €25m of EBITDA.

Meanwhile, Private school operator Dukes Education has closed a £300m debt raise with new contributions from Deutsche Bank’s direct lending arm, CDPQ, and a Middle Eastern lender.

In Germany, direct lending firm Bridgepoint Credit is providing a circa €100m debt package to back the takeover of HR software business Perbility by sponsor Rivean Capital.

And sponsor Capital A is looking to sell Dutch medical imaging equipment provider Tromp Medical, stretching lenders on a tight pricing proposal.

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