KBRA UK (KBRA) releases a report on the potential for European middle market (MM) and direct lending collateralised loan obligations (CLO). KBRA has observed increasing momentum in the formation of a European middle market, including CLOs and other direct lending vehicles, amid the rapid expansion of global private credit. The concept of whether 2024 will see the emergence of this asset class in Europe remains in its infancy; however, there is visibility on a handful of potential concentrated loan portfolios to European MM companies. In some cases, loans have been made to smaller corporate obligors, underwritten based on metrics tied to revenues rather than more traditional lending metrics, such as EBITDA. In addition, European private equity and alternative credit managers continue to raise more direct lending funds dedicated towards this segment of the market. Despite diversification and regional differences that pose challenges for portfolio construction, it is more a question of when (rather than if) Europe will see its first MM CLO.
In this report, we discuss the evolution and current state of the European private credit market, compare broadly syndicated loan and MM CLOs, and explore other types of lending facilities to private debt portfolios. KBRA has a unique insight into the landscape and trends in private credit. A comprehensive list of KBRA publications on private credit and structured credit can be found in the report appendix.
Key Takeaways
- Growth in global private credit provides a supportive backdrop for European MM CLOs. The European private credit market represents 27% of the USD1.7 trillion global private credit market, according to Preqin. Europe's expansion into this market could be further supported with the use of public capital market technology.
- European MM CLOs face regional and concentration challenges, as the loans pools contain a limited number of issuers.
- Idiosyncrasies of MM CLO portfolios drive structural differences, with limited collateral hedging and payment-in-kind loans within a pool.
- Alternatives to CLOs offer further opportunities for investors to participate in the expansion of private credit.
Click here to view the report.
Related Publications
- Private Credit: 2024 Maturity Wall Is a Myth
- Recurring Revenue Loan Metrics Dashboard: November 2023 Update
- 2024 Structured Credit Sector Outlook: Staying the Course
- European Corporates: Margins Temper and Production Slows
- European CLO Manager Style Comparisons: October 2023 Update
About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
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Contacts:
Gabriele Gramazio, Senior Director
+44 20 8148 1001
gabriele.gramazio@kbra.com
Sean Malone, CFA, Managing Director
+1 646-731-2436
sean.malone@kbra.com
Gordon Kerr, Head of European Research
+44 20 8148 1020
gordon.kerr@kbra.com
Business Development
Mauricio Noé, Co-Head of Europe
+44 20 8148 1010
mauricio.noe@kbra.com
Miten Amin, Managing Director
+44 20 8148 1002
miten.amin@kbra.com
