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The European private debt market has seen a steady growth over the last decade, creating tremendous opportunities for the industry. In 2008 the crisis and subsequent regulation were the game changers, but what are the expectations for the private debt market in Europe for the coming years? We discuss this with Jacco Keijzer, Managing Director – Global Head of Loan Markets at ABN AMRO, Geert Arlman, Director EMEA at S&P Global Ratings, Mark Huddlestone, Partner Financial Markets Group at Clifford Chance, Evertjan Manuels, European Head of Corporate DCM at Rabobank and Philip Smith, Debt Capital Markets Partner at Allen & Overy.
Keijzer: ‘For the last 20 years banks in Europe have been looking to replicate the success of the USPP market. Initially with little success due to the more fragmented nature of the European market and the generally prevailing difference in corporate funding strategies. In the US corporate funding mostly consists of 70-80% bonds and 20-30% loan, while in Europe this is more evenly split. However, more recently we witnessed strong growth across the different forms of PP (EUPP, SSD, etc.). One of the key drivers behind this has been the global credit crisis, which led to a shift in investment allocations from equity to debt while the low interest rates resulting from QE led to investors seeking alternative opportunities to enhance their yield. In our view the next 3 years are going to be very interesting for the PP market. In this period the PP market will need to prove its sustainability in an environment where public debt might once again become more attractive as yields start rising while traditional bank lenders start dealing with the effects of the introduction of Basel IV. Given how far we have come we expect that the PP market is now firmly entrenched and that we should go from strength to strength, but this is likely to be a bumpy road and not always smooth sailing.’
Arlman: ‘We expect private markets to continue their growth trajectory, predominantly driven by the long-term shift of companies from 100% bank financing to a more diversified capital structure. In recent years, private debt markets have provided especially mid-sized borrowers with interesting financing options. With this continued growth, we also expect a widening of different private financing solutions, such as openness to crossover credits structural features. At S&P we are particularly enthused about the emergence of green finance options in the private markets driven by a number of dedicated private green funds.’
Huddlestone: ‘I expect the market to continue to develop in the absence of any substantial political or economic shock. The pace of development remains to be seen but I would not expect it to be rapid but rather at a steady gentle pace. Furthermore, the market remains somewhat fragmented between Schuldschein, the French Euro PP market and other domestic markets. There is quite a lot of cross border activity, but it would help if there would be more convergence of these fragmented markets. I fear that this will take quite some time because the SS and French markets already have a certain identity and market profile which interested parties will not readily give up.’
Manuels: ‘For the coming years I expect as well further growth and “consolidation” of products within the private market.’
Smith: ‘Something that we’re increasingly aware of as a trend is the impact that technology platforms are having on this market, particularly in terms of standardisation. We expect this to drive issuance. Platformization is extremely helpful for the private debt market as it’s a tool to increase access for smaller businesses, in particular, and as they grow and look to larger deal sizes we predict that they’ll return to private debt as it’s something they’re already familiar with.”
Huddlestone: ‘There have not been any recent major economic or regulatory developments. The reasons for entering this market remain the same as they were 3 years ago: diversification of funding sources for borrowers and diversification of assets for investors encouraged by bank’s reluctance to provide long term funding in light of regulatory issues affecting them. It continues to be a borrower’s market with huge amounts of liquidity. This means that borrowers can get cheap money which in turn makes private placements somewhat less attractive because of the slightly higher pricing it demands.’
Keijzer: ‘One of the key areas where PP’s have proven a big success is in the corporate space. PP’s have been inserted in the capital structure in addition to more traditional (bank) financing, with the PP providing the advantage of a longer tenor. With the introduction of Basel IV, we would expect this trend to pick up further, especially as the tenor of debt starts weighing more heavily on lenders’ returns. Other factors that are likely to have an impact on the market are the end of QE (which is likely to impact interest rates) and possibly the EU led review of the syndicated loan market which could impact liquidity and the attractiveness of terms.’
Manuels: ‘Not too much, I have not heard from the investor nor banking side that there is something hindering/impacting the market.’
Smith: ‘We continue to see fragmentation across national pools of liquidity. EU level efforts to address that fragmentation and to stimulate the issue. Investment in PPs would be welcome.’
Manuels: ‘The European Private Placement Association (EUPPA) has as its prime objective creating, developing and maintaining a Pan-European market for ‘Private Placements’.’
Huddlestone: ‘The EUPPA continues to bring investors together to provide a platform for discussion. They also provide the opportunity for the investment community to be heard with the aim of creating a pan-European private placement market. It held meetings with French investors towards the end of 2017 and is planning a meeting for UK investors in London in Q2.’
Arlman: ‘For this young market to continue to develop, we think it is crucial to bring market participants together and exchange views. Both for issuers, investors and intermediaries, getting an update on the current state of the European private debt markets can be of high value. Additionally, newer developments such as green finance seem to be front of mind for the majority of market participants these days.’
Huddlestone: ‘We believe the European Private Debt Forum provides a great opportunity for issuers and investors to meet and discuss developments in the private debt market. It is a successful event with a good track record.’
Keijzer: ‘The EUPPA has recognized early on the opportunities offered in the EUPP market and has worked effortlessly to support the true coming of age of the product. In this context the EUPPA has always recognized the importance of bringing different market participants together and sharing best practices, something that we expect will again be the case this year and maybe more important than ever given the expected market developments and volatility.’
Manuels: ‘Rabobank is a true believer in the European PP market. We are market leader in the BLX and a founding partner of the EUPPA, so it is a logic choice for us to be a partner at the EUPDF. The event gives a good overview of the various markets and their specific features (pros and cons). It is a good opportunity to hear from issuers and investors why they are using private debt.’
Smith: ‘I have always found this forum extremely useful. It represents a valuable opportunity for participants to discuss and interrogate the factors that need to be in place for the market to thrive. I am really looking forward to discussing tech developments with attendees and learning about appetite for private debt issuance platforms, among the investment banks in particular.”
Do you want to gain a thorough understanding of the market and current opportunities? Join us at the European Private Debt Forum! We will be talking about the way the market will develop in the future, discussing recent cases and subjects such as regulations and pricing. In short, it will be the perfect opportunity to further explore the opportunities that this market has to offer.
Geplaatst op: 21 maart 2018
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