Investment bank says Europe’s private sector is more ‘stable, attractive and bankable’ than the US
June 11, 2024 (Preqin News) – Covenant default rates on private credit loans at European private companies fell to 0.6% in Q1 2024 from a three-year average of 3.9%, driven by proactive amendment negotiations, according to Lincoln International.
The investment bank’s latest Private Market Perspectives: European Edition found strong year-on-year growth rates for European private companies revenue (13.3%) and EBITDA (10.6%). This contrasts with US private company revenue growth, which has slowed for five consecutive quarters to 6.6%. EBITDA growth at US companies remained relatively stable at 5.6% in Q1, resulting in a decreased margin compression.
‘Europe vis-à-vis North America, is looking stronger in its bounce back. When you layer on top the ECB and potentially the Bank of England cutting their respective base rates earlier, while the Fed has so far taken a higher-for-longer view, it points to a more stable, attractive, and bankable near-term environment for European private credit lenders,’ Richard Olson, Managing Director in Lincoln International’s Valuations and Opinions team, told Preqin News.
‘Covenant headroom’, the agreed level of EBITDA to avoid defaulting, was 2.3x in Q1 2024 for European private companies, with smaller companies (less than $30mn EBITDA) having the least headroom. There are wide variations in covenant headroom between industries, ranging from 2.7x in business services to just 1.0x for consumer companies.
Amendment activity was high in the first quarter, with a substantial number (16%) of companies monitored in Lincoln's database having some form of amendment in the past year. The bank said this reflects lenders' willingness to provide flexibility to borrowers navigating a high-interest rate environment.
Covenant holidays accounted for 15% of amendments, with an average duration of 9.2 months, while the average maturity extension was 21 months, accounting for 26% of amendments. ‘Payment-in-kind’ pricing continued to be addressed in most pricing-related amendments, at 58%.
‘In return for relaxing on certain covenants, lenders are getting something in return, for example increased pricing, minimum liquidity covenants, equity injections, and tighter covenants in the future. All of which makes your position better as a lender,’ said Olsen.
Sponsor equity infusions accounted for just over a third of amendments (33.7%). However, Olsen said that further capital injections are not necessarily a negative: ‘Equity injections may be used for acquisitions, interest payments, reducing leverage, or providing for liquidity drawdowns that are expected over a time horizon. Private equity sponsors usually only do this in connection with other lender negotiations, maybe regarding covenants or other terms like pricing.’
Loan vintages from 2021 and 2022 accounted for more than half the amendments executed in Q1 2024 (25.9% for 2022, 24.3% for 2023), with 12.0% of companies completing multiple amendments in the past four quarters. Olsen said that over a third (35.0%) of these ‘repeat offenders’ were business services companies.
Lincoln Valuations & Opinions Group carries out over 5,000 valuations quarterly, providing 150+ transaction opinions for GP-led secondary, continuation vehicle, cross-fund / affiliate party, M&A, special situation, dividend recap, and restructuring transactions over the past three years.
The growth of private debt and its increasingly important role in financing mid-sized corporations means the asset class is attracting increasing scrutiny. In February, the EU announced the adoption of new private debt regulations, including amendments to the Alternative Investment Fund Managers Directive (AIMFD), requiring EU-based fund managers to ‘improve the availability of liquidity management tools’ and ‘alleviate risks to financial stability and ensure an appropriate level of investor protection.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.