Moody’s has predicted an ongoing growth in European non-public credit score, regardless of a latest slowdown in issuance and funding.

In a brand new report, the scores company mentioned that it expects robust inflows to renew this 12 months because the market adjusts to the brand new regular of upper charges, and extra retail buyers enter the house.

It was famous that the European and UK company non-public credit score market have been rising at a mean fee of 21 per cent every year over the previous decade. This compares with a 14 per cent common annual progress fee within the US.

Moody’s added that regulatory modifications will even open the door for retail buyers to enter the non-public credit score market, additional increasing the pool of accessible funds. The recently-introduced European long-term funding fund (ELTIF) laws must also enhance inflows into non-public credit score, Moody’s mentioned.

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“Over the previous a number of years, company issuers have flocked in higher numbers to non-public credit score as a result of lenders on this market are in a position to provide what broadly syndicated mortgage (BSL) lenders typically can’t: higher execution certainty, bespoke structuring to align with an organization’ liquidity profile, speedy execution and extra leverage,” mentioned Guillaume Lucien-Baugas, VP-senior analyst at Moody’s Buyers Service and writer of the report.

“These talents have helped non-public credit score lenders quickly diversify their choices to an increasing group of investor sorts.”

The report added that stringent regulation and consolidation on the banking aspect will proceed to push a structural shift towards non-public debt, additional fuelling progress available in the market.

Nonetheless, Moody’s highlighted the danger of rising defaults within the 12 months forward, with European defaults set to exceed 3.5 per cent over the subsequent 12 months, rising to 4 per cent within the third quarter of 2024.

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“Basically the non-public credit score and BSL markets are uncovered to related pressures, specifically extra modest prime line progress as a result of weak GDP progress expectations and better curiosity prices given the floating fee nature of loans,” mentioned Lucien-Baugas.

“These pressures will weigh on company credit score metrics, even when rates of interest begin to scale back in 2024.”

The Moody’s report additionally predicted that the European non-public credit score panorama will finally diversify into funding methods that are at the moment extra widespread within the US, reminiscent of hybrid debt-equity financing, asset-based lending and enterprise debt.

“Asset-backed finance presents appreciable prospects for the non-public credit score sector in Europe, mirroring tendencies underway within the US,” added Lucien-Baugas.

“Potential transactions might embody a broad spectrum of asset sorts, starting from portfolios of mortgage loans, non-performing loans, [corporate] loans, to contractual money flows reminiscent of recurring revenues or royalties. A handful of such non-public credit score transactions have already surfaced in Europe.”

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