Regional Q&A: European Credit with Jim Vanek

In a recent Q&A, Partner and Co-Head of Global Performing Credit Jim Vanek joined us from London to discuss the European credit landscape and what excites him most about the future of Apollo’s European platform. 

Apollo has operated and invested in opportunities across Europe for nearly two decades. Jim Vanek, Partner and Co-Head of Global Performing Credit, recently discussed market and investment trends impacting the European credit landscape, where the team is seeing investment opportunities today, and what excites him most about Apollo’s future in the region.

In Europe, rate cuts could come as soon as this month, whereas in the US the expectation around rates is ‘higher for longer’ as inflation persists. What are some of the risks and opportunities this presents?

The US economy has been surprisingly resilient and continues to expand despite unprecedented rate moves and, alongside this, inflation has been stickier than the Federal Reserve would like to see. Many businesses remain on solid footing with strong consumer demand and a tight labor market. The resulting higher-for-longer rate environment is attractive for lending, both in opportunities to extend new credit to fund corporate finance activity and facilitating refinancing transactions. Many companies that had been holding off for cuts to address near-term maturities over the last two years are using an environment that is good, if imperfect, to refinance debt, which is driving up volumes in the latter. The risk, of course, is that the longer rates remain elevated, the more pressure balance sheets come under, increasing default risk and the possibility of a stronger economic downturn in the future. This dynamic is top-of-mind for investors and why at Apollo we focus on senior, secured lending and strong credit fundamentals to navigate credit cycles.

The outlook here in Europe is much different, as inflation has fallen rapidly from its peak and rate cuts from the ECB and BOE could occur nearer term. Stronger economic contractions to-date have weakened fundamentals, but equally the road to recovery is expected to lie ahead as policymakers focus on easing financial conditions to benefit economic growth. For credit investors, this can mitigate deployment risk and we are seeing ample opportunity for more hybrid solutions as good companies look to optimize their capital structures and manage interest expense. 

What other differences between the US and European credit markets can be considered in the current environment?  

In Europe, the banking system looks fairly healthy and you haven’t seen regional banks facing the same challenges as those in the US. But from a credit extension perspective, pullbacks from lending whether due to decreasing risk appetite, regulatory restrictions or evolving shareholder priorities can have a greater impact on businesses and economies given bank balance sheets still account for the majority of credit creation in Europe.

In the US, on the other hand, differences in regulation and a robust securitization market have contributed to drive more credit into the investor marketplace where the end buyers include pensions, insurers, asset managers and sovereigns. This investor-led funding base can provide diversified sources of credit with different liability profiles and risk appetites, which can promote stability of funding and access to credit throughout cycles. 

"Hybrid financings – including things like preferred equity and convertible solutions – can be an effective tool to deleverage balance sheets in a non-dilutive manner and bridge companies through to a different rate environment, or provide liquidity to owners in an environment where exiting via a sale or IPO may not be desirable." 

Jim Vanek, Partner and Co-Head of Global Performing Credit 

Are there any specific types of financings for European companies that you think are well-suited for the current environment?

As a firm we are seeing strong demand for hybrid financing solutions, which sit in between traditional debt and equity and generally include some structure and a hybrid cost of capital (i.e., lower than traditional private equity, higher than syndicated credit). Hybrid financings – including things like preferred equity and convertible solutions – can be an effective tool to deleverage balance sheets in a non-dilutive manner and bridge companies through to a different rate environment, or provide liquidity to owners in an environment where exiting via a sale or IPO may not be desirable. This sort of liquidity is proving essential for many European companies, and having deep experience here at Apollo helps us partner with management teams and company owners to create these bespoke solutions.

You are also seeing an uptick in what some refer to as hybrid deals, wherein there are both traditional bank-led components alongside direct private instruments or asset-backed structures. Privately placed deals often support the overall financing outcomes for the corporate borrower, whether helping the business to deleverage, unlock value from unencumbered assets, or demonstrate strong conviction from a long-term institutional partner. The frequency of these dual-type transactions has certainly increased over the past two years and it’s a place where Apollo has been very active, but I also believe management teams are seeing the value private capital can bring to their businesses. We expect this activity will persist and grow in improved markets, too.

What excites you most about the future of Apollo’s European Credit platform?

The European market’s growing acceptance of private credit as a valuable liquidity and growth solution for companies and source of diversification for both investors and financial systems bodes well for the future. I’m particularly excited for the continued growth of private asset-backed finance, and we continue to scale our team and capabilities across both corporate and ABF credit here in Europe.

On the investor side of the equation, we are seeing more and more individual wealth investors and advisors look to add private credit to their portfolios. Our European Global Wealth team has made great progress, having launched a dedicated Luxembourg-based platform that makes semi-liquid private market strategies much more accessible, including private credit products. We’re excited to continue to grow our product suite to help these investors achieve their goals.