Featuring a summary of YTD activity to provide a context for the afternoon’s discussions.
Keynote: Three things to watch about the economy
Leading economist outlines the factors that will define the remainder of the year.
Panel: Private equity outlook
With EUR 750bn in dry powder in the coffers of traditional buyout shops in Europe, the outlook for dealflow is an important bellwether for credit players.
Against a backdrop of declining European M&A, sponsor-backed deals have shown resilience. The year ended with resilient PE deal activity in the face of trade wars, political uncertainty and Brexit. European M&A fell 20% whilst buyout volume only fell 10% YoY. Mid-cap buyouts (EUR 100m – 1bn) mostly responsible for an uptick in Q3 and corporate disposals were up 40% in Q3. To what extent will the year ahead be a vintage one for PE?
What are the implications for credit markets? Western European leveraged loan issuance backing LBOs fell by 23% to EUR 40.3bn in 2019. High yield bond issuance backing LBO’s was a much smaller EUR 5.6bn, with most of it coming in 2H19, and this represented a 45% drop from 2018. Looking ahead, forecasts around leveraged loan deal flow in 2020 are generally for volume to be flat-to-down from 2019’s level, with lenders pointing to the macroeconomic and political landscape as having an impact on transactions in the year ahead.
Panel: Trends in lev fin market
The story of the 2019 leveraged loan market was a familiar one. Paper for good credits flew off the shelves, whilst anything exposed to out-of-favour sectors was dragged through the ringer. What do the first few months of 2020 tell us about how this year’s story ends?
However, of 159 deals syndicated in Europe (to end November) 104 closed without any changes. Aggressive structures were the most common reason for deals to wobble, although a combination of cyclicality, Brexit and ratings downgrades also played their part. Does the bull market look set to continue?
CLO issuance hit a record-breaking EUR 29bn this year (up to December), compared to EUR 25.5bn in 2018. And that is unlikely to change in 2020 with 50 managers in Europe with at least one warehouse open. Buysiders need to, and have had to, get comfortable with terms they may have shunned before and buy the rising number of B3 rated loans in the market, to ensure they reach their required returns. How are buysiders balancing the bullish urge to pick up paper in the primary market and the bearish need to build resilience in the portfolio?
On the bond side, while sponsors continue to turn to the TLB market over high yield bonds to finance leveraged acquisitions, bonds are showing strength in the corporate BB or better markets, and unsecured and/or subordinated bonds are making a comeback. What do we expect to see in 2020?
Panel: The direct lending evolution
Direct lending is on the rise. Fundraising hit a new record in 2019, with EUR 32.2bn raised (up to December), while deal volume ticked up from 2018. But zoom into the ground level, and things looked a little less certain.
The health of portfolios has come under scrutiny this year, as the industry takes a step towards a more mature profile. A few funds found themselves in the spotlight with underperforming deals, although the stats on the percentage of companies on managers' watchlist is still relatively low, at around 7% on average. How are funds managing watchlists and what are the concerns over default rates?
Brexit uncertainty and Germany’s economic slowdown took its toll on activity in the usual core markets for direct lenders. Funds increasingly pushed for local origination to get a leg up. Firepower increased in Nordics, Benelux and Spain as increased available cash and competition also drove market expansion. What is the landscape for geographical growth in 2020?
All-senior direct lending funds are likely to further steal market share from banks, with more money being raised as investors get more risk-averse. Funds have also adopted underwriter roles before syndicating to other funds and, ironically, banks. We explore how the relationship between banks and funds is evolving; and what the experience in more mature markets tells us about the outlook? Finally, as funds seek to differentiate their product, we consider which niche strategies may succeed in the European market.
Fantasy debt investor: Would you buy it?
Sustainability looks set to be a common feature at roadshows this year, whether “green” initiatives tied to use of proceeds or “sustainability” projects with set ESG objectives. In this session, a panel of portfolio managers discusses hypothetical opportunities that are being road showed in the fantasy debt markets. Crucially, they all have a challenging ESG component that will form the subject of the debate. Our panel explores the relative value of the deals supported by data from Credit Rubric.
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