Private credit faces increasing competition from BSL market
The European broadly syndicated loan (BSL) market has shown a marked recovery in the first quarter of this year, taking market share from private credit and increasing competition.
According to DC Advisory’s European Debt Market Monitor: Q1 2024 & Outlook, published today, the first quarter of 2024 was the busiest for European BSLs since the first quarter of 2021.
BSL volumes increased to €29.3bn (£25bn), up 80 per cent from the fourth quarter of 2023 when they were €16.3bn, and up 173 per cent the first quarter of 2023 when they stood at €10.7bn.
The European Deal Market Monitor revealed that €4.2bn of the refinancing and recapitalisation volumes related to large-cap borrowers returned to the BSL market from private credit, giving the private credit space no choice but to respond with more competitive pricing and terms.
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“This report shows an unwinding of what we have seen over the last 18 months, when the broadly syndicated market, whether loans or bonds, wasn’t really there,” Ed Godfrey, managing director at DC Advisory, told Alternative Credit Investor. “A lot of the larger private credit funds stepped up, and they were able to provide financing for sponsors that would otherwise have gone to the broadly syndicated market, because private credit could provide certainty of financing.
“Now, with the broadly syndicated market back in a reasonably functioning way, we’re seeing a lot of those borrowers that took private credit money last year re-price through the more traditional market.
“What does that mean for private credit? They either need to look at the deals that they did last year and whether they can be proactive to try and keep hold of them by cutting prices or look at covenants. Otherwise, do they just go back to what might be seen as the more traditional mid-market financing situations that are probably too small or too esoteric to go to the broadly syndicated market.”
In relation to the UK specifically, the report noted that, although some sponsors still favour private credit for its less onerous diligence and rating demands, on the whole DC Advisory expects to see a continuing trend of large-cap borrowers moving back to the BSL market.
However, macroeconomic shocks could swing the balance back in favour of private credit, according to Godfrey.
“In my opinion, in recent years, the broadly syndicated loan market has become much more sensitive to geopolitical and macro events, in a way that the equity markets have been for some time,” he said. “So, if an event were to come along that might put some sand in the wheels of the broadly syndicated market, private credit may have an opportunity to step into that gap again.
“Private credit has always had to react and adapt to what’s going on and that’s what we’ve seen over the last 12-18 months.”
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The report also noted that M&A activity was low, with European M&A deal value down 12.1 per cent in the first quarter of 2024, compared to the first quarter of 2023, and down 26.2 per cent from the fourth quarter of 2023.
However, the shift to the BSL market seems to have prompted an uptick and buyouts and other M&A activity accounted for €5.2bn of institutional loan volumes in the first quarter of 2024 – an increase of 10.7 per cent on €4.7bn in the first quarter of the previous year, and up 30.8 per cent on €4bn in the final quarter of 2023.
“With improved debt market conditions and equity capital available to fund acquisitions, an improvement in M&A activity is anticipated towards the end of 2024, continuing into 2025,” the report added.
Read more: Competition intensifies between private credit and syndicated loans
