News in brief

Moody’s helps European private credit CLOs move step closer to reality

One of the longest-standing challenges for private credit CLOs in Europe has been getting a structure rated. A new report from Moody’s, written by Andreas Botterbusch and Thorsten Klotz, suggests they are now ready to do that.

The report’s title, Robust structures will mitigate heightened collateral risks in private credit CLOs, gives away its main thrust. One section explores what private credit is likely to mean in Europe. “While some European private credit CLOs will be akin to US middle market CLOs... others will likely be backed by loans to considerably smaller companies, such as those whose debt backs small and medium-sized enterprise asset-backed securities.”

Moody’s points to the historical challenges of collateral diversity, liquidity and the use of credit estimates instead of ratings, but it has a solution. “Based on recent conversations with market participants, we expect private credit CLO structures to be similar to those of BSL CLOs, but with some stronger features that make up for their relatively weak collateral.”

The downside to the solution is that those structural features will cut into the arbitrage. But that may not matter. One CLO investor told us to expect one or two PC CLOs this year, driven by a desire from managers to be first into the new asset class.

Equity piles up in European direct lending portfolios after debt swaps

In the past six years, prominent credit providers including Goldman Sachs, KKR and CVC — among dozens of others — have participated in debt-for-equity swaps, taking full or part ownership of companies to which they had been lenders.

Of the 61 equitised deals analysed, only five have been fully realised, leaving debt funds with more than 55 equity positions on their books. Alcentra participated in at least 14 debt-for-equity swaps between 2018 and February 2024, the highest number for a single lender recorded by Debtwire. These deals account for nearly a quarter of all transactions in this timeframe.

“Contrary to what is stated in the report, many of the transactions listed are investments from Alcentra’s special situations team, where investing on the basis of a balance sheet recapitalisation and engaging in a business turnaround are key elements of the strategy,” said a spokesperson for Alcentra.

Other European debt managers among the top lenders by measure of equitised deals include Permira Credit, Partners Group and KKR Credit. Some of private equity’s best-known names, such as KKR, Carlyle, CVC and Bain Capital, have found themselves on the other side of debt-for-equity swaps with credit funds. Most equitised loans were initially provided to private equity-backed companies.