In spite of economic challenges (or perhaps because of them) which include rate hikes, inflation and geopolitical conflicts, the UK’s leveraged finance market has continued to support innovation, M&A and infrastructure. Indeed, with the UK leading in public to private transactions, delegates at NatWest’s UK Leveraged Finance Conference heard that the market is expected to remain open, driven by issuer demand and liquidity spread dynamics.

The themes of the day formed a comprehensive coverage of different parts of the market, including capital markets, private equity, consumer, the secondary market and ratings agencies – and brought to life by a similarly diverse range of speakers and panelists representing firms such as CVC Capital Partners, BlackRock, Morrisons, CreditSights and Moody’s. 

The current market environment is open to issuers, with collateralised loan obligations (CLOs) continuing to print and loan deals pricing tighter. While there is anxiety about certain sectors, particularly automotive, there appears to be a price for every issuer. Investors are considering underweights and potential performance opportunities in sectors with limited supply, such as data centres and defence.

In one panel session, speakers confessed that the investment environment is challenging due to post-Brexit announcements, potential recession and inflation concerns. Despite this, they emphasised the importance of consistent investment throughout the cycle. While some sectors and regions are being re-evaluated for risk, diversification remains a priority, and opportunities are still being sought, particularly in sectors like software, where valuations may be more attractive.

Part of that attractiveness may be found at the smaller end of the market. While there is no technical minimum size for active portfolios, the decision to invest in smaller deals depends on factors like sector exposure and potential returns, delegates heard. Private credit is seen as a viable option for companies seeking certainty in execution, especially during volatile times, but syndicated markets broadly offer better pricing and terms in normal market conditions. And in private equity, firms are open to investing in various sectors and geographies, with a focus on diversification.

The current market volatility is also a challenge for exits, with a significant gap between buyer and seller expectations. This has resulted in a pragmatic shift in the industry, with a focus on deal flow and a willingness to leave money on the table to secure transactions. While the dividend recap trend has not significantly impacted the market, private credit remains a viable option, offering flexibility and accommodating complex scenarios.

On the High Street, the UK consumer is facing economic pressures, including inflation, rising taxes and increased costs for essentials. This has led to a slowdown in consumer confidence and a focus on value for money. Naturally, businesses are adapting by investing in technology to streamline operations, particularly in labour-intensive sectors like hospitality, to offset rising labour costs and maintain customer satisfaction.

The UK market is facing significant challenges due to a confluence of factors, including rising wages, increased costs, and new regulations. Retailers are grappling with how to pass these costs on to consumers without impacting customer satisfaction or investor confidence.

During market turbulence, investors navigate by ensuring liquidity, revisiting valuations, and strategically positioning portfolios. While global funds offer flexibility, liquidity in the cash market remains challenging. Despite the US consumer’s strength, Europe’s cheaper valuations, favourable macroeconomic outlook, and supportive central bank policies make it an attractive investment option, though concerns about US withdrawal and energy dependence persist.

The investment landscape is complex, with event risk impacting investment-grade markets and potential shifts in trade relationships. While sectors like autos and chemicals face challenges, real estate and telecoms remain attractive. Ultimately, decision-making involves a micro-level approach, considering company fundamentals and liquidity, while maintaining a long-term perspective to avoid chasing short-term market fluctuations.

Against the complex backdrop of US trade policy, and the unpredictability of tariff announcements and implementation, companies are impacted beyond demand volumes and price. They are also facing tougher financing and warier investor sentiment.  

The current market environment is characterised by differentiation between stronger and weaker credits, with weaker issuers facing liquidity challenges. While there is optimism about the resilience of companies and the availability of financing options, concerns remain about potential pockets of volatility and the impact of tariffs on specific sectors. The role of private credit is seen as positive, providing a constructive force during market turbulence and supporting market activity.

The private credit market, particularly direct lending, has grown in importance, providing financing to companies that struggled to access public markets. However, concerns exist about transparency, asset valuation, and potential pricing risk due to increasing competition and complexity. Despite this, direct lending is widely seen as a valuable tool, working alongside bank lending and offering flexibility.

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