Direct lending trends in Europe

June 11, 2024

Even in a climate of higher interest rates, borrowers and lenders are still looking to private credit as a key source of funding.

The change in the interest rate environment over the last couple of years hasn’t diminished the popularity of the direct lending market. Explore some of the trends we’re seeing and what direct lenders should look for in a service provider.

A growing market

High interest rates have impacted European markets in many ways, but the appeal of private credit remains stronger than ever.

“2023 put increased pressure on borrowers as the markets moved into a higher interest rate environment,” says Hugo Smyth, vice president of business development for U.S. Bank Global Corporate Trust. “But borrowers and lenders are still very willing to use private credit as a core funding source.”

This year, the market continues to expand. Average transaction sizes are increasing, and lenders are continuing to tap the market to grow their own funds and launch new direct lending funds.

According to S&P Global Ratings: “The private credit market's growth has been spurred on by over a decade of easy money and a search for yield, and grow it has – assets under management (AUM) have quadrupled in the past 10 years.”

All indicators point towards continued growth in the sector.

Benefits of a credit fund lender

In this growth environment, one notable trend stands out – the increasing size of private credit club deals among direct lending funds.

“This trend has allowed lenders to finance loans that were originally open only to the bank syndicated lending market – with direct lenders filling a void,” says Hugo.

The market itself has been driving this development. Since the financial crisis, banks have been more restricted in how much they can lend, to whom they can lend and the parameters for those loans. This, in turn, opened opportunities for new markets and new entrants into this market – which prompted funds toward lending.

Compared to their alternatives, credit funds present a more flexible option for loans.

“In the right circumstances, funds can get to know the clients better, do more detailed credit analysis around the borrowers, assess borrowers more thoroughly and perform due diligence tasks more quickly,” says Hugo.

Looking ahead, the direct lending market should continue to grow as banks become even more restricted in their lending opportunities via on-going risk and regulatory restrictions.

“Credit funds provide a nimble and focused product, and our equally nimble loan agency team at U.S. Bank is well positioned to support them,” says Hugo.

Agency market development

As the market has shifted away from the bank lenders toward direct funds, it created opportunities for third-party agents to step in and support these transactions in the role of facility agent and security trustee. This has created a new market for loan agents to pursue: servicing those sponsor-led, or private-equity-led, direct lending funds.

With the key change in this market being the source of quality long-term lending shifting from banks to credit funds, having an experienced and highly rated financial institution as an agent still presents significant benefits – especially if anything were to go wrong.

“An agent with no conflict of interest on either the lending side or by way of any PE-sponsor ownership gives all parties peace of mind,” says Hugo.

What to look for in a direct lending service provider

To meet the demands of modern direct lending, the best type of service provider is an established yet flexible institution.

“In this specific market where there is competition from both bank and non-bank agents, U.S. Bank is in the excellent position of being a highly rated financial institution with no conflicts of interest,” says Hugo. “We don’t lend, arrange or advise in Europe, and we’re not owned by any PE sponsor.”

Your service team should be able to turn transactions around quickly and understand the demands of the modern-day documentation requirements for these deals. For the best success, find a partner that’s a stable, flexible, quick moving, experienced, well-established, non-competitive, highly rated financial institution.

“The market has moved,” says Hugo, “and you need a partner that understands that and has moved along with it.”

Here are a few additional benefits you should look for in a quality partner:

Comprehensive review of all loan documents

Tailored loan statements

Monitoring of cash flows and executing payments

Calculation of waterfall payments on complex facilities

Bespoke reporting, including borrower compliance reports

Monitoring of hedging arrangements

Maintenance and back-up of all loan information such as credit agreements, interest payments and redemptions

At U.S. Bank, we provide professional and independent facility and security agency services for credit facilities. As an active member of the Loan Market Association (LMA), and a leading CLO and credit fund loan administrator, we have experience with a diverse range of loan and bond financing structures such as syndicated issues, club deals, successor agency, unitranche and bridge financing.

For more information about our European trustee solutions, visit our website or contact Hugo Smyth at hugo.smyth@usbank.com.

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Disclosures

U.S. Bank Global Corporate Trust is a trading name of U.S. Bank Global Corporate Trust Limited, U.S. Bank Trustees Limited and U.S. Bank Europe DAC (each a U.S. Bancorp group company). U.S. Bank Global Corporate Trust Limited is a limited company registered in England and Wales having the registration number 05521133 and a registered address of 125 Old Broad Street, Fifth Floor, London, EC2N 1AR. U.S. Bank Global Corporate Trust Limited, Dublin Branch is registered in Ireland with the Companies Registration Office under Reg. No. 909340 with its registered office at Block F1, Cherrywood Business Park, Cherrywood, Dublin 18, Ireland D18 W2X7. U.S. Bank Trustees Limited is a limited company registered in England and Wales having the registration number 02379632 and a registered address of 125 Old Broad Street, Fifth Floor, London, EC2N 1AR. U.S. Bank Europe DAC, trading as U.S. Bank Global Corporate Trust, is regulated by the Central Bank of Ireland. Registered in Ireland with the Companies Registration Office, Reg. No. 418442. The liability of the member is limited. Registered Office: Block F1, Cherrywood Business Park, Cherrywood, Dublin 18, Ireland D18 W2X7. Directors: A list of names and personal details of every director of the company is available for inspection to the public at the company’s registered office for a nominal fee. In the UK, U.S. Bank Europe DAC trades as U.S. Bank Global Corporate Trust through its UK Branch from its establishment at 125 Old Broad Street, Fifth Floor, London, EC2N 1AR (registered with the Registrar of Companies for England and Wales under Registration No. BR020005). Authorised and regulated by the Central Bank of Ireland. Authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Luxembourg, U.S. Bank Europe DAC trades as U.S. Bank Global Corporate Trust through its Luxembourg Branch under RCS number B244276 with its registered office at 4, rue Albert Borschette, L-1246 Luxembourg, and is regulated and authorised by the Central Bank of Ireland (CBI) as well as by the Commission de Surveillance du Secteur Financier (CSSF). Details about the extent of our authorisation and regulation by the CBI and the CSSF are available from us on request. All banking services are provided through U.S. Bank Europe DAC. U.S. Bank Global Corporate Trust Limited and U.S. Bank Trustees Limited are Trust Corporations and not banking institutions and are not authorised to carry on banking business in the United Kingdom, Ireland or any other jurisdiction.

All banking services are provided through U.S. Bank Europe DAC. U.S. Bank Global Corporate Trust Limited and U.S. Bank Trustees Limited are Trust Corporations and not banking institutions and are not authorised to carry on banking business in the United Kingdom, Ireland or any other jurisdiction.

U.S. Bank National Association is not responsible for and does not guarantee the products, services, performance or obligations of its affiliates.