A Review of European Direct Lending (First of a Series)

Over the years the US has been by far the dominant supplier of leveraged loans globally. (See our Chart of the Week) But given similar regulatory pressure being exerted on overseas banks as here, Europe is gaining media attention as a source of debt opportunities for both managers and investors. How should these opportunities be viewed relative to senior credit in the US? Is there something fundamentally different about the direct lending space in Europe, or is it the same asset dressed in a different currency?

According to S&P LCD, Europe was a €15 billion market in 1998. Before that deals got done among an informal club of banks. Things remained clubby through the early 2000’s when a growing number of institutional buyers pushed the market over €100 billion.

Then following the bull loan market of 2006-07, it peaked at €165 billion. As cash flowed into funds and CLOs, the sell-side friendly features of the US broadly syndicated market crossed the Atlantic. But that all came to a halt with the credit crisis. Loan volume collapsed after 2008 and was on its way back until 2012, when the imposition of new regulatory frameworks knocked activity down again.

Today the European loan market is where the US was in terms of development a decade ago. Unlike the US, disintermediation of regulated lenders in Europe by non-banks has only been going on since 2009. Banks there have always played a central role in corporate lending, and while their share has eroded, it’s still well over the 10% of banks here.