The debt market: Challenges remain but cause for optimism

Deloitte audit partner Marc Cleeve Picture: SUPPLIED BY DELOITTE

AFTER a challenging year for the private debt market, there have been some causes for optimism in 2024, with some positive statistics around deal activity and increasing competition in the sector.

This was one of the key messages from Deloitte’s Debt Sector Market Update, which took place last week, and gave insights into market trends and tax developments.

Opening the event, UUֱ-based audit partner Marc Cleeve said that while the environment remained challenging, “the spike in corporate defaults, which was widely expected 12 months ago, hadn’t really kicked in”.

He also said that there had been an increase in club lending deals and covenant-lite loans.

Meanwhile, Matt Reynolds, a member of Deloitte’s global climate sustainability network, highlighted the ever-increasing adoption of AI among financial services firms.

“Last year, $35bn was invested in AI by financial services firms, while our survey of more than 2,700 executives showed that 94% saw AI as being critical to business success in the next five years and that 82% had already deployed three or more AI devices,” he said.

He also stressed the economic implications of climate change, pointing to research which showed that the economic losses caused by long-term shifts in weather patterns and temperatures could reach US$178-182 trillion by 2070.

“This will be caused by a range of factors including changes in crop yields, land and capital stock damages and damages to human health, reducing productivity,” he said. “This is a bleak picture, which shows why governments are legislating to change this trajectory.

“Projections show that through actively and quickly addressing climate change, economic gains of US$43-51 trillion could be made through initiatives such as the mobilisation of capital in Europe, the acceleration of current and future clean energy projects and transformation of the supply chain.”

He was followed by Jed Poole, a manager in Deloitte’s UK consulting and advisory practice, who highlighted that around 80% of European private debt deals were private-equity-backed.

While acknowledging that European private debt volumes were down 20% in 2023 compared to the previous year, he said that not everything was “doom and gloom”, saying that some of the “largest-ever European private debt deals” had taken place during the year, and that a number of hybrid and innovative debt structures had been introduced to support borrowers.

Looking at the securitisation market, Steve Webber, who leads Deloitte’s structured finance advisory business, said that while there had been a “slowdown in the residential mortgage market”, the average household debt-to-income ratio had dropped.

He also said that consumer confidence was “picking up” and that UK consumers “seemed to be weathering the storm and feeling more optimistic about the future”.

Bringing the webinar to a close, Dale Hewitt-Smith, a director in Deloitte’s credit and restructuring team, highlighted the growth in the Qualifying Asset Holding Company regime, which was introduced in 2022.

“As of April this year, there were just short of 400 such structures, with many of them being used by private clients or institutional investors as a holding platform for credit funds,” he said.

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