Already a member? We were thrilled to present ELFA's Annual Conference 2024 in collaboration with our co-hosts at Milbank. We brought together our members, partners and other market participants for a full day of panels and discussions. Thanks to our incredible speakers and thought-provoking discussions, we explored a wide range of critical topics shaping the leveraged finance market. Thank you to everyone who took part in the day.
The mood was much more positive compared with 2023’s event. Our panellists pointed to the turn of the rate cycle, a period of good corporate financial performance, the conclusion of elections in the U.S. and UK with much of the associated uncertainties now behind us, and most importantly, the strong growth of levfin across Europe. And unlike last year, there was almost no talk of defaults as the default rate is ‘still pretty low’.
- An expectation that Private Credit will continue to grow exponentially. Direct Lending in Europe is already estimated at $3 trillion of dry powder and one estimate floated a forecast of Private Credit one day growing to a $25 trillion asset class.
- The Leveraged Loan market is approaching the size of the High Yield market. The European CLO market is growing faster than in the U.S. and is now established as a stable, novel asset class.
- High Yield markets ‘can’t get much better’ according to one seasoned investor, with another pointing out that HY market is ‘becoming higher quality and more efficient’.
- The ‘tidal wave of liquidity’ is propelling growth of levfin, with more and more derivations of leveraged finance.
However, there are still big challenges to tackle with a clear consensus that lenders need better disclosures and more standardisation of reporting data, more engagement with management teams, and better communication amongst parties including ongoing feedback after transactions. In High Yield, lender protections ‘have got worse in recent years’ including new provisions with detrimental impacts; and timing of deals has got tighter making it harder for investors to make informed investment decisions.
• Challenges persist around information quality, transparency, and standardisation. Building enhanced communication, clearer frameworks, and quantitative measures is essential to market resilience.
• A standout point was Europe’s lack of a central regulatory body like the SEC in the U.S. with a mandate for full disclosure where everything must be publicly filed and where enforcement ensures higher disclosure standards. Also, insolvency laws are standardised and clearly understood throughout the U.S. but much more complex across different European markets.
• While EU directives do exist, stronger enforcement by a regulatory body would encourage proactive disclosure practices by companies.• Despite their significance, covenants continue to erode with well-performing credits demand aggressive terms, while weaker credits accept stricter covenant packages.
• Key issues include a lack of time to properly review terms and insufficient understanding of provisions from CFOs—both contributing to this decline.
• Ongoing reporting needs to be better and prompter – ultimately this will improve pricing for borrowers.• CLOs now represent 68% of loan buyers. Popularity due to locked-in capital, hedged by a currency match to $ or € and provides duration, stability and liquidity has caused the CLO market to double and double again.
• The European CLO market is gaining ground faster than in the U.S. CLOs have brought stability to the market and established a new asset class. On the horizon, the introduction of CLO ETFs in Europe is seen as a major step in democratising credit as an asset class.
• Now estimated at $3 trillion, private credit continues to grow, offering greater flexibility and better recovery rates than the syndicated market. One panellist could see the proliferation of Private Credit growing the market to $25 trillion in the future.
• Collaboration with banks, acting as complementary partners for private equity financing, remains critical for success.
• The biodiversity crisis is as urgent as the climate crisis, with 30% of species critically at risk of extinction.
• Politics this year will likely shape climate progress, placing the onus on companies and lenders to drive meaningful change. Investors are driving much of the reforms but there is still a lack of disclosure on biodiversity (only 7% of companies disclose).
• It was felt that previous regulation didn't take transition into its approach, with regulators now rewriting regulation to ensure a more flexible approach for the future, which should be better for everyone.• A global taxonomy that includes transition is needed to define it rather than leaving it to corporates to define transition and accelerate progress.
• While progress has been made, challenges remain. Top-down commitment is key, and tailoring DEI initiatives to individual organisations is critical for fostering retention and inclusion.
• It was no surprise that AI featured heavily as this year’s buzzword! The conversation has matured beyond ChatGPT, focusing on how structured data and AI adoption can enhance efficiency and differentiation in credit markets.
• AI and automation are increasingly viewed as key differentiators for investment managers, driving intelligent innovation and growth of AUM.
• A sensible starting point is to define a firm’s credit data strategy, structure data and to hire computer programmers.Read coverage of the event in Debtwire’s weekly leveraged market review