UK: An Introduction to Banking & Finance

Overview

After a challenging period of elevated rates, Europe’s finance markets are growing following stabilising costs, rising competition and renewed opportunities for deal-makers.

Finance markets entered 2025 following a solid performance in 2024, with the syndicated loan and high yield bond markets rallying and private debt remaining active. European loan and bond issuances nearly doubled year-on-year. Refinancing and repricing drove activity as issuers returned to the market to take advantage of lower interest rates and declining borrowing costs.

With base rates falling, investors with a renewed appetite for high yield have been eager to provide their support. Moreover, with the revival of the loan and bond markets, borrowers have jumped at the opportunity to push out maturities and lower financing costs. In some cases, borrowers have taken the opportunity to refinance pricier unitranche structures provided by private debt players with cheaper loan and bond options. This shift has created a fluid market where quality borrowers have a broader range of products to choose from and the ability to select the best possible financing options to match their specific requirements.

Although public debt markets have regained market share, private debt players remain as relevant and active as ever, with their ability to price risk and deliver rapid deal execution. With all the lending channels open again, the competitive dynamic between public and private debt providers has intensified to the benefit of the borrowers. Private debt players have tightened margins and offered more flexibility to win new business.

Public debt markets have sharpened execution and broadened the types of facilities they offer. The only missing piece of the puzzle in 2024 has been a steady pipeline of new M&A and leveraged buyout financing opportunities. This absence has been a function of an only moderately improving M&A deal market rather than a lack of investor and lender appetite. However, there is a growing optimism that deal activity will increase within the next 12 months as interest rates come down and vendors and buyers align on valuation.

Rate Cuts Put Financing Markets Back on Track

Falling interest rates have been the primary catalyst for the market’s revival, with both the European Central Bank and Bank of England making interest rate cuts in 2024 for the first time in two and two-and-a half years respectively. Lower rates have spurred activity in the collateralised loan obligation (CLO) space. Lower base rates have also caused borrowing costs to fall, as have tighter margins in the leveraged loan markets and lower yields to maturity in the high yield space. Borrowers have jumped at the opportunity to refinance existing capital structures at lower prices. Repricing activity has also ramped up with anecdotal accounts of some issuers repricing loans up to two or three times during the year.

Private and Public Debt: A New Dynamic

Lower pricing in the broadly syndicated loan (BSL) and high yield markets has tipped the balance between public and private debt back in favour of public debt markets. Credits financed with more expensive private debt unitranche structures in some cases flipped back to BSL and high yield options over the course of 2024 as borrowers capitalised on lower costs during the year. The increasing competition between BSL and private debt has directly benefitted borrowers. In addition to refinancing in the public debt markets, borrowers have been able to negotiate lower margins with incumbent private credit providers. However, the dynamic between private debt and the BSL markets has not been an exclusively competitive one – some issuers are opting to include tranches of financing from both sources in their capital structures. Some banks and private debt managers have formalised these relationships by establishing partnerships where banks leverage their branch networks and geographic footprints to originate loans. These partnerships can then be shared with private credit partners, so that banks do not have to hold the full loans on their own balance sheets.

The Evolution of Syndicated Loan Markets

After a lengthy hiatus between H2 2022 and the end of 2023, BSL markets are back and hungry to finance deals. In 2024, European syndicated loan issuance nearly doubled the full-year figures the market recorded in 2023, driven by interest rate cuts in Europe and the UK, and tightening margins. This brought down financing costs for many borrowers, spurring a wave of refinancing activity.

Lower financing costs have enabled arranging banks to become more assertive when competing for business with direct lenders. With BSL markets in better health, we have seen some borrowers actively looking at the opportunity to refinance private debt facilities—which they had arranged when interest rates were climbing—with materially cheaper syndicated loans.

The BSL market has also become more flexible, with many stakeholders now offering features such as delayed-draw facilities in BSL loan packages. This marks a significant evolution of the BSL product, with the shift in the terms offered eroding the traditional distinctions between BSL deals and private debt. The use of the delayed-draw offer within the BSL structure illustrates how far the market has come to make its proposition more competitive.

The way that BSL markets interface with private debt has also become more dynamic, as have the pathways to loan syndication. While BSL and private debt markets do compete with each other, syndicated markets have recognised the value of partnering with private debt players in certain circumstances. For example, private debt providers can help enhance a capital structure by providing second-lien debt behind the first-lien financing raised in the BSL market. Meanwhile, the delta between the sterling and euro overnight lending rates has seen some private debt players fund the sterling denominated portion of a loan, with the BSL market funding the euro denominated portion. Regarding the various routes to a syndicated loan, a select group of large-cap sponsors with the necessary scale and consistent deal flow have fleshed out their own syndication desks. These sponsors have found success in structuring and syndicating loan packages for their own deals directly, further enhancing the BSL market’s functionality. Despite facing challenges in recent years, the BSL market has demonstrated its ability to improvise, adapt and remain relevant, and enters 2025 stronger than ever.

A Mature, Sophisticated Market

Last year’s wave of repricing and refinancing activity, in addition to the evolving relationship between public and private debt markets, is reflective of an increasingly sophisticated European loan market that is better able to respond quickly to changes in the business environment. Investment banks, investors and borrowers were ready to spring into action as soon as interest rates began to recede, while remaining sensitive to any lingering concerns around risk. Few deals have priced outside of initial guidance, with all parties focused on seamless execution and completing deals with minimal disruption. The only piece of the puzzle missing from the market in 2024 was a full recovery in M&A and buyout transaction volumes. But, if the speed of the market’s response to an improving interest rate environment is anything to go by, chances are that lenders and borrowers will be ready to spring into action as soon as the first signs of a much-anticipated M&A revival materialises.