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European junior debt opportunities opening up according to Park Square
by Lisa Lee
As Park Square celebrates its 20th anniversary, we asked the firm’s founder and managing partner Robin Doumar about the private credit landscape in Europe.
When Park Square launched 20 years ago, it was with a EUR 1.05bn mezzanine fund — the largest first-time fund of its kind in Europe — with the backing of some large Canadian pension plans like OTPP that were interested in starting a private credit business focused on junior debt. Two decades later the firm manages USD 16bn in capital.
The market for junior debt has been subdued but, according to Doumar, that is changing as a reopened CLO market drives leveraged loan spreads in.
“The opportunity set around junior credit is highly interesting. It’s a fabulous opportunity today because it is usually used as a financing cocktail where you’ve got a low-cost, broadly syndicated loan together with some form of junior debt, whether it’s second lien, PIK, pref, etc. And the overall maths today for that BSL and junior combination is very attractive,” he said.
Another theme that Doumar has been seeing in junior debt is private equity firms holding assets longer and LPs wanting their money back. As a result, private equity firms are looking at dividend deals to return some capital to LPs, which is also attractive for junior debt.
The overall maths for that BSL and junior combination is very attractive
Robin Doumar
Founder and managing partner
Park Square
A third element is cash deleveraging. Base rates have risen massively and are starting to bite. One solution for companies is to use non-cash-pay securities to reduce cash-pay senior debt. For firms like Park Square, that presents an opportunity. “We find PIK particularly attractive today because it’s something that the capital structures of many of these companies need.”
As for Park Square, it sees growth in the future in three pockets: scaling its mezzanine business, the large-size senior debt, and the middle market direct lending businesses.
“Junior debt opportunity is super attractive right now. I think direct lending continues to be attractive, although obviously margins have come in. And I also think large-size senior credit is attractive,” said Doumar. “We’ve obviously seen a bounce up in pricing, or you’ve seen margins contracting. But I think a nicely diversified portfolio of high-quality, large-size senior debt is also super attractive.”
