Q2 2021
Interview
Direct lenders have “performed well, deployed well, and created a very active market”
Matt Christmas
International Head of Leveraged Finance DLA Piper
Matt Christmas, DLA Piper’s international head of leveraged finance, speaks with European Direct Lending Perspectives about the strength of the market, a unitranche comeback, ESG and the outlook for 2022
Q.
How has direct lending fared in H1?
A.
Activity has been very strong, especially in the UK. But the market has not just been dominated by bigger houses — funds have been active across the board, and they’ve been more flexible. There is so much liquidity that they are not only doing unitranche deals – they might also do second lien or super senior or go in as a co-investment in certain deals. They’ve performed well, deployed well and created a very active market.
Q.
Is the situation the same across Europe?
A.
Very much so. There are a lot of great examples across the continent. A lot of private credit funds are deploying in the Netherlands. We’re also seeing strong movement from international direct lenders in the Nordics, particularly Sweden. Direct lending in Germany also did well in H1, and that is likely to continue. In France, though pricing favours the banks, the market is still performing well.
Q.
Unitranche as a percentage of deals has fallen. Do you see this trend continuing?
A.
Unitranche is currently about 50% of the market, and we don’t think that will fall further. Banks may be trying to beat direct lending providers at their own game. HSBC has got its asset management platform to provide a direct lending solution alongside the bank. Investec has established its own direct lending platform. This will have an impact on the market, which might be why the percentage of ‘pure unitranche’ deals has dropped, but we don’t see it falling any further.
Q.
What kind of impact is ESG having on direct lending? Is the market taking it seriously?
A.
We’re seeing it more across our international team. Some direct lenders are signed up to the UN principles on responsible investing and want certain clauses in their documentation to reflect that. In many cases, they’re the ones driving this, more so than the borrowers.

The current climate means ESG is definitely higher on the agenda for everybody. But we’re still in the early stages of how this will make a significant impact on the structure of lenders’ portfolios or those loans’ pricing. We expect this to increase over time. But change is already apparent — there are now funds set up to buy ESG assets, and we think we’ll see this happening more in this space.
Q.
Looking ahead, what does the pipeline look like? What key trends are coming through?
A.
More of the same. It’s already been a very active H2 year and our attention, along with our clients’, is turning to 2022. Initially, everyone was looking for a massive slowdown and increase in restructurings, but that just isn’t where the activity has been. As things have played out to date, it’s been so busy on the new money M&A side of things. If you talk to the transaction service providers and the financial due diligence teams in the accountancy houses, they are fully booked until early next year. There’s a huge pipeline of activity.

Inevitably, with the tapering off of some of the government support programmes, you may find that pressure is going to build in some of the portfolio deals at the start of next year. And that might mean that lenders have to focus on that because they won’t want to lose money rather than deploy new capital. So that might be where more challenges arise. At the moment though, we aren’t really seeing that happening across Europe.
Generally, there’s a positive outlook across most sectors and countries. Obviously, sectors such as retail have struggled or may struggle, depending upon how well capitalised they are. But, otherwise, my European partners and I are very positive about the outlook across the UK, Germany, Ireland, Spain, France and much of the continent. Everybody’s going to be busy for the foreseeable future.
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European Direct Lending Perspectives
Q2 2021
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