Europe’s direct lending market shrinks in first half of 2020

Direct lending in Europe cooled in the first half of the year after a flood of central bank interventions helped financially strained companies borrow through public markets instead.

The number of direct lending deals, in which funds make loans that would traditionally be made or arranged by banks, completed in Europe fell by 29 per cent in the first six months of 2020 compared with the same period last year, according to figures from Deloitte.

The data highlight how central bank and government stimulus measures aiming to ease the economic hit from coronavirus enabled more struggling companies to raise money on public debt markets rather than pursuing the costlier private route.

Fewer mergers and acquisitions at a time of heightened uncertainty also resulted in fewer private debt deals. There were 140 deals in the first half of 2020 compared to 197 in the same period in 2019.

“We haven’t seen a massive wave of companies going to private markets to raise more stressed debt given that governments have stepped in,” said Floris Hovingh, partner and head of alternative capital solutions at Deloitte.

“Some of the opportunities which might have been done by direct lenders went to the high yield market and loan market given the pricing is slightly cheaper,” he added.

Private credit funds often act alone or in a small group, lending directly to companies and offering loans with unconventional features. These deals give companies greater secrecy and flexibility at a cost as groups typically pay higher interest rates privately than on the public markets.

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Cécile Mayer-Levi, head of private debt at Tikehau Capital, said: “There is a very limited number of transactions and competition is really fierce among advisers, among private equity sponsors and among private debt funds.”

Rajeev Misra, SoftBank Vision Fund chief, said at the recent Milken Institute Global Conference that it is “very difficult to deploy capital” because companies can raise plenty of funding through public markets rather than accept private backing with strings attached. “Anyone looking for capital . . . the public markets are the best option,” he said.

Still, asset managers are rapidly raising money they hope to plough into private credit in anticipation of debt restructurings as well as mergers and acquisitions arising from the pandemic. The largest lenders have also turned their attention towards megadeals which are deemed less risky.



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