“The #unitranche was invented in response to broken capital markets, when banks were backing away. Today it’s thriving when markets are booming.”  

The size of these financings has also grown dramatically. How large could they get? We remember the same questions being asked about broadly syndicated loans in 2007.   

If the largest direct lenders collaborate, a $5 billion unitranche could come by year-end. Particularly with a large software company...

According to Refinitiv LPC, US #unitranche volume came to almost $22 billion last quarter – the highest level they’ve tracked historically.

At the same time, one-stop risk/return dynamics have moved in favor of issuers. The average debt/ebitda is now at a record high 5.9x, with all-in Libor spreads hovering around 600 bps.

As we told M&A magazine, recently, “The disintermediation away from the loan syndication market to private credit has accelerated in this hyper competitive M&A climate. That’s included their credit providers...

In October 2015 we published a white paper: “The Unitranche – What it is, and Why it Matters.” In it we called the unitranche “one of the most innovative, and increasingly popular, financing tools in the middle market.”

The following year Ares reached a milestone by leading, for Thoma Bravo’s Qlik Technologies, the first $1 billion unitranche. Other mega-tranches soon followed as larger issuers recognized the value of one-stop financing.

The broadly syndicated market, after all, involves more time to distribute and more lenders to negotiate with...

As we conclude our European private credit series, let’s review what we’ve learned:  

1. Europe suffered a similar Covid slump (and enjoyed a similar rebound) as the US. Deal volumes are at record highs. Europe retained the country-by-country distinctions they had pre-Covid.   

2. Pricing in the US and across the pond is close. Though European upfront fees are higher, certain terms are decidedly more issuer-friendly. Banks have been more aggressive than direct lenders in some locales...

This week’s Chart of the Week highlights how US and European private debt fundraising came into Covid with a head of steam, slowed, and has now picked up.  

Our content partner,   , recently published excellent commentary related to investors’ views of the “European opportunity.” One CIO said it started looking more attractive when US yields dropped precipitously last year. Since then, the difference in yields as shrunk.   

According to PDI, there’s $116 billion of funds in the North American market, $85 billion in Europe and $12 billion in the Asia-Pacific region.

We continue our conversation with Lincoln International’s European office.  

“US and Europe are competing markets,” Xenia Sarri told us. “The US was increasingly aggressive six years ago, but now terms are more favorable in Europe. There are no baskets around restricted payments. No excess cash flow sweeps, no amortization and tighter flex language.  

Are there pricing differences? “Arrangement fees are twice as high in Europe as in the US,” Dominik Spanier said. “We think this is because the US is a more mature market. But margins (as our Chart of the Week shows) are very similar. Also, the European secondary market is less well-established.”...

Calculating European direct lending volume is a bit dodgy. But we can triangulate from other metrics.  

The par amount of all leveraged loans was €15 billion in 1998, per S&P/LCD. It grew to 140 billion before the GFC, and is now a record €240 billion. Conservatively assuming one-third is held by non-banks, that puts it at just under €100 billion.  

That’s consistent with Preqin data. As our Chart of the Week highlights, assets under management for European direct lending is almost $160 billion, including about $50 billion of dry powder...

Last week we tuned into Fitch’s European Leveraged Finance Mid-Year Update. The discussion – covering the economy, ratings, and structures – was virtually indistinguishable from recent US market conferences. Apart from the distinguished accents.  

Volume, for example, has returned to pre-Covid levels. Terms, that were so investor-friendly a year ago, are now decidedly issuer-friendly. Price recovery is so complete, there’s nothing to tamp down frothy conditions.  

Our friends at Tikehau reported 1Q activity, combining both loans and bonds, was €80 billion; more than double 4Q’s performance...

Our fondness for colorful metaphors led us, in our 2016 series, to compare European direct lending to Burger King’s new hot dog venture. The burger giant’s thesis was to apply “sixty years of flaming-grilling expertise,“ but also recognized they’d have to “chop the onions a little differently.”  

Apparently, hamburger prowess didn’t translate to frankfurters. They were pulled off the menu six months later.   

Similarly, there are fundamental differences between US and European private credit markets. A recent survey in Private Debt Investor showed only 22% of private equity sponsors favored unitranche solutions, preferring bank loans instead....

Say what you will about last year’s Covid-induced downturn in the US beginning in March. But it paled in comparison to the UK’s economic cratering. Not since the Great Frost of 1709 had that proud nation suffered such a dramatic slump.   

But then, like the US, the UK and Europe began to recover in similar fashion. In the credit markets as well: from revolver draw-downs, to the commercial upswing and deal snap back in the fall, and the rush closings at year-end.  

Five years ago we published a white paper that highlighted how European leveraged lending has historically been dominated by the commercial banks...