Private Credit Ties To Banks Deepen In Europe As Default Risk Rises

• The recent findings from the Bank of England indicate that within the private credit market, defaults have remained relatively low compared to lending to riskier borrowers. S&P Global anticipates that defaults among European speculative borrowers may escalate to 3.75% by June, yet the expected surge in corporate restructurings hasn't materialized, surprising many in the industry.
• Peter Marshall, co-head of European restructuring at investment bank Houlihan Lokey, notes the absence of widespread corporate restructurings, sparking curiosity within the market. This phenomenon is attributed to the flexibility in lending and the utilization of intricate refinancing structures by private credit funds, as reported by multiple sources to Reuters.
• Deloitte's analysis reveals that a significant portion of European private debt deals involve only one lender, granting them considerable control over the terms and interest rates. Some funds, like those represented by Patrick Marshall of Federated Hermes, are adjusting loan terms such as covenant headroom to defer stress, albeit potentially resulting in lower recoveries.
• Collaborative efforts between private credit funds and company owners are also highlighted as a strategy to circumvent losses. Meanwhile, the prevalence of payment-in-kind facilities (PIKs) and debt refinancing, as observed by credit intelligence provider Reorg and Deloitte respectively, underscores the creative measures taken to manage debt obligations.
• The integration of private debt funds into the banking ecosystem is increasingly apparent; with practices like leverage deployment mirroring those in the U.S. Ares Management's substantial fundraising further accentuates the growing investable capital in the private credit sphere, albeit accompanied by potential risks during market downturns.
• In light of these developments, there are discussions about the necessity of further regulation to ensure stability within the private credit market.

(Source: Reuters)