Navigating Complexity in the European Debt Markets

1. The Pros and Cons of Clubbed Transactions

In recent years, clubbed unitranche structures have gained traction in the middle market, becoming the preferred outcome for many private equity sponsors. This approach, where funds are “clubbed” into a single debt structure, has been favoured for several reasons. Chief among them is the additional firepower it brings to M&A activity, but it also serves as a relationship management tool, allowing sponsors to share transactions with more parties. Furthermore, it provides the ability to leverage multiple relationships when changes are needed or if performance challenges arise. While historically it was assumed that having one decision maker was the path of least resistance, experience has shown that this can create inflexibility while different points of view around the table can bring advantages.

Despite this, clubbed unitranche structures introduce potential complications for borrowers, particularly where extension of maturities is needed. Issues can arise, for instance, when one lender is tied to an older fund that has reached the end of its investment period and is unable to roll into a new structure. To avoid this, it’s important to ensure that funds being clubbed have a broad alignment of fund capacity / investment period. Where existing fund constraints have presented a challenge, some direct lenders have explored continuation vehicles for a small collection of assets, providing scope to extend maturity or refresh a funding structure. However, this approach remains relatively nascent in Europe, with limited adoption to date.

As the market evolves, it will decide whether the benefits of clubbed unitranche structures outweigh the complexities they introduce. For now, borrowers and sponsors must navigate these challenges with careful planning, proactive lender engagement and a clear understanding of the potential risks inherent in both types of structures.

Baird Debt Advisory can explore capital structuring options to simplify your club composition.

2. The Revolving Credit Facility (RCF) Conundrum

The traditional divide between private credit funds (providing term debt) and commercial banks (providing RCF and transactional banking) is blurring. As debt funds aggressively seek to deploy capital and provide the "whole financing suite", the RCF has become a critical battleground. While the convenience of a single lender is attractive, the operational reality of fund-provided RCFs versus bank-led facilities introduces significant trade-offs that borrowers must consider carefully.

Historically, a borrower would pair a unitranche facility from a debt fund with a super senior RCF from a commercial bank. However, securing a standalone RCF from a bank has become increasingly challenging. Banks generally view the RCF as a low-margin product that consumes significant capital and their appetite to provide it on a standalone basis is diminishing. To make the economics work, banks typically require a broader relationship, including hedging, payroll and cash management mandates. Furthermore, the process of raising a bank RCF is often as rigorous and time-consuming as raising the term debt itself. In time-pressured M&A processes, coordinating a separate bank workstream can add a layer of execution risk and complexity that sponsors are increasingly keen to avoid. To solve this friction, private credit funds are increasingly offering to underwrite the entire capital structure, including the RCF. This "one-stop-shop" approach simplifies execution and provides certainty of funds. However, this convenience comes at a cost – both economic and operational. Until a commercial bank can be brought in, RCFs are typically priced in line with the unitranche and same-day drawdowns can be a challenge.

This dynamic has created a clear competitive advantage for the select group of credit funds that can offer operationally flexible, bank-like RCFs. A commonplace middle ground is through formalised bank-fund partnerships, offering a joint product. These joint ventures allow borrowers to access the depth of private credit with the operational efficiency of a bank. There are also emerging funds that have raised appropriately priced capital to become true alternatives to the commercial banks.

Baird Debt Advisory can help you find the optimal solution and ensure all options are explored.

3. Nordic Bonds: A Flexible Alternative to Private Credit

The Nordic bond market has quietly evolved from a regional niche into a pan-European financing tool. In 2024, the total market grew by 6.5% to reach €120 billion in outstanding volume, with new issuance surging by 60% year-over-year. This growth is not just driven by Scandinavian issuers; other European borrowers are increasingly looking to the Nordic region to tap into deep liquidity pools and structural flexibility that other markets cannot match.

For private equity sponsors, the Nordic bond market offers an intriguing alternative to private credit, particularly for businesses in more out-of-favour sectors like Consumer and Industrials where direct lenders may be reticent or price wider. Recent data shows that private equity-owned companies now account for ~35% of the Nordic high-yield market, validating its role as a mainstream LBO financing route.

While unitranche remains the preferred route for execution certainty, Nordic bonds can offer superior economics and operational freedom for the right credit. Structurally, the differences are equally pronounced. Nordic bonds utilise an incurrence-only, “covenant-lite" framework similar to the high yield market. Execution in the bond market is market-dependent, relying on open windows and investor sentiment to clear, whereas private credit offers the certainty of closing through bilateral negotiation. Reporting standards also diverge significantly: while unitranche lenders receive regular, compliance-focused data packages to monitor maintenance covenants, Nordic bonds require extensive, narrative-driven public disclosure to satisfy securities regulations and educate a broader investor base.

The Nordic market's heritage in cyclical industries (e.g., Energy and Shipping) has cultivated an investor base comfortable with volatility. This makes it an ideal venue for some consumer and industrial credits that might struggle to find efficient pricing in the direct lending market. For most, however, the optimal strategy is not to choose one path, but to dual-track a Nordic bond solution alongside a private credit process. The competitive tension this can create can drive tighter pricing and overall more attractive capital structures.

Baird Debt Advisory has experience in these dual-tracked processes and can help you assess the Nordic bond market alongside a unitranche and determine the optimal financing solution for your business.