Moody’s predicts ongoing boom in European private credit
Moody’s has predicted an ongoing boom in European private credit, despite a recent slowdown in issuance and funding.
In a new report, the ratings agency said that it expects strong inflows to resume this year as the market adjusts to the new normal of higher rates, and more retail investors enter the space.
It was noted that the European and UK corporate private credit market have been growing at an average rate of 21 per cent per annum over the past decade. This compares with a 14 per cent average annual growth rate in the US.
Moody’s added that regulatory changes will also open the door for retail investors to enter the private credit market, further expanding the pool of available funds. The recently-introduced European long-term investment fund (ELTIF) regulations should also boost inflows into private credit, Moody’s said.
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“Over the past several years, corporate issuers have flocked in greater numbers to private credit because lenders in this market are able to offer what broadly syndicated loan (BSL) lenders often cannot: greater execution certainty, bespoke structuring to align with a company’ liquidity profile, speedy execution and more leverage,” said Guillaume Lucien-Baugas, VP-senior analyst at Moody’s Investors Service and author of the report.
“These abilities have helped private credit lenders rapidly diversify their offerings to an expanding group of investor types.”
The report added that stringent regulation and consolidation on the banking side will continue to push a structural shift toward private debt, further fuelling growth in the market.
However, Moody’s highlighted the risk of rising defaults in the year ahead, with European defaults set to exceed 3.5 per cent over the next 12 months, rising to four per cent in the third quarter of 2024.
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“Fundamentally the private credit and BSL markets are exposed to similar pressures, in particular more modest top line growth due to weak GDP growth expectations and higher interest costs given the floating rate nature of loans,” said Lucien-Baugas.
“These pressures will weigh on corporate credit metrics, even if interest rates start to reduce in 2024.”
The Moody’s report also predicted that the European private credit landscape will eventually diversify into investment strategies which are currently more common in the US, such as hybrid debt-equity financing, asset-based lending and venture debt.
“Asset-backed finance offers considerable prospects for the private credit sector in Europe, mirroring trends underway in the US,” added Lucien-Baugas.
“Potential transactions could encompass a broad spectrum of asset types, ranging from portfolios of mortgage loans, non-performing loans, [corporate] loans, to contractual cash flows such as recurring revenues or royalties. A handful of such private credit transactions have already surfaced in Europe.”
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