No Match Found
By Richard Siddall, Head of Debt & Capital Advisory, PwC UK
In 2008, liquidity all but dried up. But the credit market is very different today. While the established banks are still an important force, and far better capitalised than they were, there is now also a much more diverse set of options that includes challenger banks, asset-based lenders and private credit funds and institutions.
Private credit funds and other nonbank lenders have had abundant dry powder at their disposal. Until quite recently, they’ve also been able to take advantage of benign economic conditions and a low interest rate environment. This has allowed them to seize market share from banks, particularly in the leveraged finance market, and offer flexible finance to mid-market and SME businesses.
The economic shocks of the past three years have turned credit conditions and underlying assumptions on their head nonetheless. We’ve had the microchip shortage, supply chain breakdown, the Suez blockage, the war in Ukraine, the energy crisis, intensifying competition for talent and now inflation at rates at their highest since the 1980s.
And as difficult as the challenges are now, there is further upheaval ahead as the move to net zero gathers pace and Generative AI spearheads the next wave of technological disruption. Strategies, operational capabilities and even whole business models will need to be rethought and reconfigured as a result.
With costs rising and trading more volatile, many businesses need fresh finance to weather the immediate storms. They also need to sustain investment in technological and ESG advancements and potentially acquisitions to keep pace with the transformations in their sectors.
The net result of this uncertainty is that refinancing arrangements that would have been readily available over the last ten years are not always accessible through the traditional routes.
While the European high- yield bond market has shown some recovery in 2023, volumes are still below the long- term average. The make-up of these issuances is heavily skewed towards seasoned issuers, and the vast majority in EUR with very low GBP volumes. Many companies are still questioning where inflation and base rates will end up, and therefore there is still some reluctance to lock in fixed rate funding at present.
The European leveraged loan market remains active, but since the middle of 2022, at a slower pace. Slower in fact than the first COVID summer of 2020. Many larger and mid-size corporates are being forced to look elsewhere for finance.
If we look across the mid and SME markets, the clear message is that businesses can no longer take the rollover of maturing finance for granted. And even if they can secure it, the pricing and terms will have moved significantly.
In a final twist, the ceiling on how much businesses can borrow is likely to be lower due to the increased cost of debt and more prudent appetite from lenders. For example, a company that could previously achieve a five-times levered arrangement may now be looking at- three-four times.
The better news is that private credit funds still have plenty of dry powder that they’re motivated to put to work. We estimate this to be more than €50 billion across Europe at the latest count. We’ve seen them offering finance to some of the larger corporates as an alternative to the high- yield bond and leveraged loan markets. By clubbing together, private credit funds can provide significant levels of finance to large clients, while sticking within their individual credit ceilings.
But there are preferences for some sectors rather than others, creating a more binary market. Lenders favour sectors with dependable long-term revenue streams such as healthcare and technology, media and telecommunications. By contrast, sectors where revenues are under pressure and where uncertainties about the future are most acute, including consumer-facing businesses, are having to work much harder to win over lenders.
So what’s the way forward? The bar for refinancing is rising. But we are still managing to help many businesses secure the funds they need by making the most of today’s diverse financing options. Four priorities stand out: