2021 will be a landmark year for direct lending

Q1 2021

Editor’s letter

Dan Alderson

Deputy Editor Creditflux

Welcome to the 10th edition of the Creditflux and Debtwire European Direct Lending Perspectives (EDLP). In this issue, we examine how various components of a standout Q1 have boosted direct lenders’ optimism that 2021 will build progressively on the momentum gathered in the second half of 2020.

Hopes are high that 2021 will be the biggest year to date for private debt, and European direct lending got the memo in Q1. At €6.33 billion issued from 150 deals, it was just €270 million short of the record-holding Q3 2019. The upward trajectory has market practitioners excited, given the 53% uplift from Q4 2020’s €4.13 billion.

In one respect this is unsurprising since Europe is playing catch up with more mature markets like the US. Uptake within different countries across the region is also more varied.

More generally, the COVID-19 pandemic, after initially denting volume, has accelerated the growth of private debt. Cautious banks have left a gap, while borrowers have valued the bespoke nature of private products and better speed of execution. Lender returns have proved strong, and loss rates low.

But headline volume numbers tell only part of the story — the increasing average size of deals tells another. Unitranches, while accounting for two-thirds of direct lending volume in Q1 2021, fell in number for both large-cap and mid-market borrowers to a historic low of just 43% of total transactions.

Leading this bigger deal volume trend, UK holiday company Bourne Leisure’s mammoth £1.8 billion unitranche became the largest on record, surpassing UK insurance broker Ardonagh’s £1.6 billion facility in June. The Blackstone buyout financing exemplified a quarter in which UK business continued to dominate, new money unitranche activity surpassed previous records, and M&A accounted for 90% of unitranche issuance.

Cautious banks have left a gap, while borrowers have valued the bespoke nature of private products and better speed of execution

Direct lenders have, for the most part, focused on deals in resilient end-sectors such as IT services, software and healthcare, while prioritising experienced management teams and private equity sponsors. Bourne skewed Q1 sector analysis, but TMT made up more than one-quarter of total direct lending activity.

COVID-19 vaccine rollouts in Europe remain uneven, and the pandemic’s impact has not been fully felt, with government support schemes having kicked the can down the road. The challenge for direct lenders is to understand companies’ true underlying earnings, even as markets mostly fail to accurately price inflation risk.

Despite these concerns, mid-market issuance has consistently climbed back quarter over quarter to pre-pandemic levels with €4.2 billion raised, of which almost 60% came via direct lending facilities. This, thankfully, picks up the slack from non-direct lending issuance, which is plumbing its lowest level since Q3 2018.

In this edition, we look back over the quarter to draw out key themes for the year ahead. You will find the usual incisive fundraising and deal analysis, league tables and news, as well as features on where demand is concentrating and possible headwinds to what otherwise looks set to be a historic year for direct lending.

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