European Mid-Market Debt Update – 2021 Year Review

We are pleased to share our latest debt mid-market update. In this issue, we present the results of our H2 2021 survey as well as the overall results for 2021, which track deals completed by over 55 leading European bank and non-bank lenders. We also provide commentary on current trends in the European debt mid-mid markets, including insights into key trends in UK asset backed lending (ABL) and a general market outlook for 2022.

Key Highlights

• M&A continues to drive record levels of debt capital deployment. Western European mid-market M&A activity was EUR 244bn in 2021, representing approximately a 93% increase over 2020. The uptick was fuelled by high levels of equity and debt fund dry powder and strong deal making appetite, driven by optimism that the worst effects of the pandemic are likely behind us.
• Bank lending appetite has increased, but debt funds continue to provide the lion’s share of debt capital deployed. When compared to 2020, the percentage of deals led by banks increased in 2021. This can largely be attributed to banks’ renewed appetite for leveraged loans following a period of intense focus on existing clients and a COVID-19 impacted loan portfolio in 2020. Debt funds continue to represent the majority of deals; however, their market share dropped slightly compared to 2020.
• Defensive sectors continue to be the preferred destination for capital in 2021. With nearly 65% of transactions in Technology, Media and Telecoms (TMT), business services, financial services and healthcare, leveraged lending continued to focus on businesses in defensive sectors, The data does, however, show a steady increase in appetite for other sectors such as consumer, hospitality, engineering and education.
• Despite record levels of capital deployment, debt fund dry powder remains high, reflecting the strong fundraising environment in 2021. Despite record levels of fund deployment in 2021, dry powder levels remained relatively flat at USD 118bn, when compared to 2020. Interestingly, dry powder for Senior Debt strategies reached a record high of 49%, while dry powder for Special Situation and Distressed focused strategies reduced from 26% in 2020 to 22% in 2021. 
• UK ABL deal activity continues to increase, up 54% in 2021 compared to 2020. Deal activity shifted from new client deals to refinancings/extensions, with the majority of activity  focused on the sub GBP 20mn segment.

Outlook for 2022

Looking forward, the geopolitical climate is currently front of mind, casting some level of uncertainty over the initial positive outlook for 2022. While the mid-markets are generally less volatile than the syndicated loan and bond markets, investors and lenders will want to consider the impact on businesses and the economy, and also pay increased attention to potential sovereign risk and potential actions that could be taken. This is compounded by pre-existing concerns about inflation, interest rates, supply chain issues and high systemic levels of leverage as a result of pandemic led support and loan schemes. We anticipate increased levels of credit scrutiny and fierce competition for high-quality credits, as well as an increase in restructurings and (dis)stressed refinancings.