The European market for sub-investment grade corporate credit continues to evolve at pace. This is driven in large part by the ongoing shift towards direct lenders as a growing source of debt financing.
This shift is supported by recent changes in the economic landscape (including as a result of the global pandemic) as well as legislative changes in domestic insolvency processes / deregulation, encouraging corporates to recapitalise or restructure without using traditional funding sources. With direct lenders raising ever larger funds and having the flexibility to deploy across the credit spectrum, they now are putting pressure on the capital markets by presenting issuers with a stable source of day 1 and future capital when other lenders may be looking to retrench.
At a pan-European level, the recast European insolvency regulation overlay continues to seek to regulate forum shopping and to rebalance the interests of creditors and debtors in securing certainty of outcome when things go wrong. All the while, political pressure demands reduced flexibility to mitigate tax liabilities and increased regulatory transparency from counterparties across the capital structure.
This gives rise to a number of questions for market participants, such as:
- Can a fund make a new loan to a borrower without a banking licence?
- Do taxes or other charges usually present a material issue to a fund lending directly to, or taking credit support from, a company incorporated?
- Could loans from a fund that owns the borrower of that loan incorporated be equitably subordinated?
- Can interest, fees and remuneration be agreed freely between a fund and a borrower?
- Can a fund directly hold security granted by a security provider incorporated?
The answers to these and other questions will vary across different European jurisdictions – a high-level summary for 14 countries is available in this guide.