The availability and pricing of debt (and at what levels) was a constant discussion during 2023. There is some good news for 2024. Expectations are that interest rates have peaked and, whilst it will be slow and gradual, the next moves expected from the Bank of England, ECB and Fed are rate cuts, with Fitch predicting policy rates to fall by 75bp by the end of 2024 in all three regions.
However, there are countervailing macroeconomic concerns and, consequently, growth expectations are down relative to 2023. In all, market participants are likely welcoming greater stability and an improved long term investment outlook in connection with a 'soft landing' and falling interest rates may also put greater pressure on lenders and investors to deploy capital while returns are still elevated. This is a fundamental dynamic to monitor.
During 2023, direct lending was a key source of credit for a large number of private equity transactions. With significant dry powder, the European private credit industry is hoping for a better deal market in 2024 so more of that can be invested. Whilst we have seen banks returning to the leveraged loan market (and expect this to accelerate as market participants embrace 'the new normal'), we expect private credit to remain a strong source of financing in 2024.
We have seen 2023 continue bringing an overall tightening of terms, partly because of the shift away from syndicated products to private credit, where the providers tend to invest with a view of staying in the credit through maturity. We foresee a comeback of sorts for the traditional syndicated market as we expect pricing pressure to force a tightening of the gap between private credit and syndicated deals, prompting more market participants to opt for the streamlined, efficient syndicated process.
Along with interest rates, the increased pressure from looming maturities will be another major driver of market activity. We have advised on an increasing number of 'amend and extends', liability management and reorganisations prompted by portfolio companies that are in (or are approaching) default and/or are approaching maturity dates. We expect this to continue in 2024 with a real focus on credit quality, but we expect to see a shift over the course of the year towards broader opportunistic refinancings as interest rates are cut.
On the company side, working with advisers to formulate a constructive strategy well in advance of pressure points is imperative to seize market windows and drive good outcomes.
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