Since our last market update in April 2020, there have been numerous positive market developments, giving rise to a more optimistic outlook when compared to earlier in the pandemic. Only a few months back, we saw a short-term supply shortage in new lending which resulted in a temporary spike in yields. This has since normalized with loan margins tailing off and deal flow increasing. However, whilst there is increased M&A activity, European market data is demonstrating relatively low deal activity with year-to-date value down 36% compared to the previous year.1
The improvement in debt market conditions has mainly been driven by direct lending funds with robust dry powder levels. On the contrary, the majority of banks remain cautious, which is also extending to the provision of super senior debt facilities. Many funds are reporting a strong pipeline for Q4 2020, with a particular focus on defensive credits. As a result, lending terms for these types of deals have largely reverted to pre-COVID-19 levels.
COVID-19 related government schemes have been a major factor across the European debt market and have proven successful in most countries. Across the UK, Germany, France, Italy and Spain, EUR 542.9 billion of loans have been approved, however the UK schemes have been largely off limits for PE-owned businesses.2
Going forward, there is continued uncertainty surrounding the resurgence and lasting effects of COVID-19, compounded by the geo-political environment and uncertainty as to who will be the winners and losers when government support schemes come to an end. Incumbent lenders have generally been supportive of their clients to date, with little action taken on riskier loans; however, this behavior may change in the medium term. Overall, we expect an uncertain and bifurcated debt market outlook. This will likely be characterized by direct lending funds’ focus on defensive sectors and with borrowers in more cyclical and COVID-19 affected sectors forced to turn to asset-backed lending or more expensive pools of capital. We also expect increased restructuring activity in the medium term.
We discuss the above trends in more detail, with additional market data, in the attached report.
1 Mergermarket as of 30 September 2020
2 Sum of various government loan schemes: Bank of England as of September 20 2020, HM Treasury as of October 21 2020, Bundesministerium fur Wirtschaft und Energie of October 21 2020, Ministere De L’Economie Des Finances et De La Relance as of October 02 2020, Ministerio de Asuntos Economicos as of October 16 2020, Sace Simest Gruppo cdp as of October 14 2020