Money managers are seeing a resurgence in European banks' appetite to provide loans in parts of the direct lending market, adding another layer of competition to an already crowded market.
Sources said they have seen some European investment and commercial banks' appetites to lend normalize, following years of reticence as they labored to comply with regulations designed to stabilize and derisk the banking system after the financial crisis.
While the trend varies by country and market segment, competition is particularly acute in the senior-secured part of the private debt market — an area in which sources said direct lending managers already faced hurdles because banks have advantages including existing relationships with borrowers. Sources also highlighted that direct lending is a highly competitive market just from the choice of strategies available from money managers. Data by Preqin Ltd. show that, at the start of April, there were 348 private debt strategies in the global market looking to raise $168 billion from investors. Direct lending strategies account for 170 of that total, targeting $74 billion in assets. On the banking side, the Association for Financial Markets in Europe's high-yield data report shows leveraged loan issuance totaled €195.3 billion ($233.9 billion) in 2017, up 37.9% year-over-year.
"The bank retrenchment which was evident several years ago has now slowed or stopped as bank balance sheets have been repaired," said Patrick Marshall, head of private debt and collateralized loan obligations at Hermes Investment Management in London. "In fact, some banks which had exited the leveraged loan market or had mothballed their leveraged loan functions are now actively re-entering the market and taking share."
The onset of rules after the global financial crisis, such as Basel III, saw banks pull back to their home countries.
"That trend is ongoing but certain in the U.K.," said James Pearce, head of direct lending at M&G Investments in London. "And pre-crunch, banks typically held large, single-name positions; where a small number lost money was because of a high concentration in single names. Fast-forward to today and I think we've seen bank market appetite has normalized. They are all looking to grow market share and position, but I wouldn't say their risk appetite has materially changed — it has normalized." After the crisis, he noted, banks had "overcorrected."
Since the financial crisis there has been "€600 billion ($739.2 billion) of shrinkage of European banks' balance sheets," covering lending to non-financial corporates, said Fabian Chrobog, managing partner at North Wall Capital LLP in London.
Banks had in recent years been concentrating on simpler, larger deals with key clients. But as the market normalizes, "banks are once again competing with direct lenders," Mr. Chrobog said.
A resurgence in bank lending was identified as the biggest challenge to the direct lending market over the coming years by 24% of 80 respondents to a recent survey of private debt and private equity investors in the U.K., Europe, North America, Africa, Asia and the Middle East by fund trust and corporate services provider Intertrust Group BV, Amsterdam.
"Our study shows that despite the rise of private debt funds, professional investors believe that traditional banks will continue to be a dominant force in lending," said Michael Johnson, St. Helier, Jersey-based director, head of funds-Channel Islands, at Intertrust.
But there are regional variations, said Mr. Johnson and other sources, with Germany still dominated by the banks, which are "in a strong position to re-enter the market," Mr. Johnson said; while the U.K. market has been disintermediated by the private debt managers. "In contrast, U.K. banks that have retreated from traditional branch networks are much less likely to be able to regain this role for themselves, and so will need to turn to partnerships with private debt managers," Mr. Johnson added.