Marathon Asset Management reposted this
Euro Credit on the Rise European economic growth has been sluggish for the past 1,5, 10 years with its equity markets lagging the U.S.. Euro credit markets on the other hand have shown relatively strong performance in step with the U.S.. Euro credit offers terrific value that I find equally dynamic v. U.S., and allocations on both sides of the Atlantic is compelling when investing in credit, particularly in high-quality fixed rate debt. The Fed, BoE, and ECB will likely cut rates in September, a small step forward to relieve financing pressure as SOFR/Euribor moves marginally lower by 25bp. U.S. net new issuance for non-IG credit over the past several years has grown primarily in private markets as direct lending gains market share growing in par balance while the HY/BSL market maintains its size. In Europe, there has been less growth in private credit since loans are primarily a bank-led marketplace, however the direct lending market is large and growing. I expect direct lending and private credit opportunities to advance in Europe in the years to come. In the first half of 2024, direct lending in Europe was strong, with LBOs leading deal flow of 34.6% of originations, followed by bolt-ons with 33.8%, and refinancing at 16.5% and CapEx/Other at 15.1%; with an average debt-ebitda ratio of 5.06x for newly originated direct loans. A healthy dynamic is playing out in European credit that is worth noting as I discuss in these bullet points and the table below: European HY growth over the past 5 years is +17% v. U.S., HY bonds which were flat, while the European BSL market tripled in size and the U.S. BSL market grew by +45% as private credit most of the growth during this time frame Euro HY bonds have a better credit skew with 71% rated BB v. 53% BB in U.S. European loans have 0.6x less leverage than U.S., also a favorable credit skew Euro HY bonds have a wider spread than U.S. (+353bp vs. +321bp) Default rates are roughly the same on both sides of the pond (~3%) European credits have seen few LME compared to U.S., but this too is changing with 4 large cap structures representing €52.3B: €25B Altice, €15.5B Thames Water, €7.5B Ardagh, and €4.3 Intrum all in need of capital solutions Caution is advised as default rates are expected to increase in Europe, as companies with large capital structures come into focus. Marathon sees this as an opportunity and have become increasingly active in Europe with the addition of senior investment professionals who have joined us from leading firms. The growth of the European public and private credit markets and compelling relative value comparisons with the need for capital solutions and LME should provide savvy global investors with an expanding and dynamic investment landscape.
