Q2 2024 Lincoln European Senior Debt Index
Lincoln International is pleased to release the latest quarterly European Senior Debt Index (ESDI). The ESDI represents years of research and analysis of data and was developed by professionals from Lincoln’s Valuations & Opinions Group in collaboration with Professor Pietro Veronesi of The University of Chicago Booth School of Business.
The results of the ESDI were no surprise as they continued to showcase the same trends and observations seen in Q1 2024. The ESDI yielded 10.7% annually, reflecting another stable annual yield relative to the prior quarter as base rates ceased their upward trajectory. Similarly, the second quarter of the year finished with a fair value of 98.5 for the ESDI, a modest improvement relative to the 98.1 fair value from the previous quarter.
The ESDI provides insight into the direct lending market as it is a fair value index consisting of four components:
|
In addition, we provide additional descriptive statistics including:
|
-
Quarterly Overview
- IMPORTANT DISCLOSURE
- The ESDI provides insight into the direct lending market as it is a fair value index consisting of four components: 1. Total return (income return plus capital gain return); 2. Price (i.e., fair value); 3. Spread; and, 4. Yield to maturity.
- In addition, we provide additional descriptive statistics including: 1. The impact of interest rates (base rates) and credit changes (spread) on total return; 2. Decomposition of yields into implied spreads, base rates and floor rates.
- Comparing Lincoln’s European and U.S. Senior Debt Indices
| 98.5 |
| Average Fair Value of Loans in the Index as of Q2 2024 |
The European non-investment grade corporate loan market has two segments: the broadly syndicated loan (BSL) market, which attracts investors investing in broader syndicated deals, and the direct lending market for investors investing in club deals. While correlated, there are subtle but significant differences between the two markets. Both markets primarily provide floating-rate loans; however, divergences exist in terms of market liquidity, company size and credit facility size. Given the greater liquidity in the BSL market, pricing and terms are a function of the technical market and competitive factors, whereas the more illiquid direct lending market has a stronger orientation to assessing company fundamentals.
In contrast to the Morningstar European Leveraged Loan Index (ELLI) which is comprised of companies borrowing in the BSL market, the constituents in the ESDI are virtually all companies borrowing in the direct lending market.
The direct lending market is a significant source of capital to private equity backed middle-market companies. The ESDI benefits market participants by providing information to facilitate a greater understanding of the attributes of this important source of capital to the private sector.
How We Obtain the Information
On a quarterly basis, Lincoln values over 5,500 private companies primarily owned by over 170 alternative investment funds and lenders to funds. Most of these companies are levered via borrowings from the direct lending market. Lincoln’s European private market coverage represents 10-15% of the total volume of private companies valued quarterly. A significant percentage of ESDI constituents are based upon valuations of loans provided for non-public BDCs and other private investment vehicles and, therefore, not disclosed in public filings.
For many of the private companies valued quarterly, Lincoln advises on the fair value of at least one senior debt security in the capital structure. All valuations conform with IFRS and U.S. GAAP and fair value principles and have been reviewed by fund management, fund boards, limited partners and auditors.
Additional information can be found in our methodology discussion and on our website: www.lincolninternational.com/perspectives/an-overview-of-the-lincoln-senior-debt-index
Results
Total Return
The starting date of the Lincoln ESDI is December 31, 2018 commencing with an index value of 100.0.
Comparison of Total Return – Lincoln ESDI to Morningstar ELLI
Correlation and Comparison of Quarterly Returns – ESDI to BSL Market (ELLI)
Yields
Comparison of Yields – ESDI to BSL Market (ELLI)
Decomposing Yields in the European Direct Lending Market: Weighted Average Base Rates / Floors and Spreads
Note: Weighted average floor and weighted average base rate are calculated based on index weightings of different securities
Fair Value – Price – Trends
Fair Value – ESDI Compared to the ELLI
Note: Price based on fair value of the ESDI and average bid of the ELLI
Bifurcation of the Impact on Total Return Due to Credit Risk and Interest Rate Risk
Decomposition of Index Returns – Interest Rate versus Credit Risk
SummaryQ2 2024 European Senior Debt IndexFrom 2018 through June 30, 2024, a portfolio of direct lending loans has yielded higher returns and lower volatility relative to broadly syndicated loans. The ESDI provides market participants with many unique valuation insights into the fair value of direct lending loans and represents a significant enhancement to the information available within an opaque market. |
Comparing Lincoln’s European and U.S. Senior Debt Indices
Lincoln International releases two private credit reports each quarter: the U.S. Senior Debt Index (LSDI) and the ESDI, encompassing our comprehensive data research and analysis.
The indices provide overviews of the U.S. and European markets and reveal a high correlation of private credit lending returns and yields between both geographies since 2019.
How We Obtain the Information
On a quarterly basis, globally Lincoln values over 5,500 private companies primarily owned by over 170 alternative investment funds. These companies are levered via borrowings from the direct lending market. We then bifurcate loans by geography creating a U.S. Senior Debt Index and a European Senior Debt Index. As the subject companies are private, both the U.S. and European Senior Debt Index constituents are based upon Lincolns valuations of these loans for our alternative investment fund clients and therefore not disclosed publicly. For many of the private companies valued quarterly, Lincoln advises on the fair value of at least one senior debt security in the capital structure. All valuations conform with U.S. GAAP and IFRS and fair value principles and have been reviewed by fund management, fund boards, limited partners, and auditors. The U.S. and European Senior Debt Indices are size-weighted. However, the maximum contribution to the index of any single loan valuation in any period is 2.0% (i.e., no one loan can constitute more than 2.0% of the overall index value).
Additional information about the methodology discussion can be found at: www.lincolninternational.com/perspectives/an-overview-of-the-lincoln-senior-debt-index
Results
Quarterly Returns
Comparison of Quarterly Returns – ESDI to LSDI
| Index | Quarterly Return | Standard Deviation | CAGR (since Q1 2019) | Standard Deviation of Annual Returns (since Q1 2019) |
| ESDI | 3.2% | 12.6% | 8.8% | 2.7% |
| LSDI | 2.8% | 13.2% | 8.2% | 3.5% |
Index Yields
Comparison of Yields – ESDI to LSDI
Fair Value
Comparison of Fair Values – ESDI to LSDI
Methodology
Academic Advisor
Professor Pietro Veronesi is the Chicago Board of Trade Professor of Finance at the University of Chicago, Booth School of Business. He is also a research associate of the National Bureau of Economic Research and a research fellow of the Center for Economic and Policy Research.
Professor Veronesi’s research has appeared in numerous publications, including the Journal of Political Economy, American Economic Review, Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics and Review of Financial Studies. He is the recipient of several awards, including the 2015 AQR Insight award, the 2012 and 2003 Smith Breeden prizes from the Journal of Finance, the 2008 WFA award, the 2006 Barclays Global Investors Prize from the EFA, the 2006 Fama / DFA prizes from the Journal of Financial Economics and the 1999 Barclays Global Investors / Michael Brennan First Prize from the Review of Financial Studies. Professor Veronesi teaches both masters- and Ph.D.-level courses. He is the recipient of the 2009 McKinsey Award for Excellence in Teaching.
His undergraduate work was in economics at Bocconi University where he received a laurea magna cum laude with honor in 1992. He earned a master’s degree with distinction in 1993 from the London School of Economics. He joined the Chicago Booth faculty upon obtaining his Ph.D. in Economics from Harvard University in 1997.
IMPORTANT DISCLOSURE: The Lincoln European Senior Debt Index (Lincoln ESDI) is an informational indicator only, and does not constitute investment advice, an investment recommendation or other information recommending or suggesting an investment strategy (within the meaning of the EU and UK regulations), or an offer to sell or a solicitation to buy any security. It is not possible to directly invest in the Lincoln ESDI. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the Lincoln ESDI, and these opinions and assumptions may prove incorrect. Actual results could vary materially from those implied or expressed in such statements for any reason. The Lincoln ESDI has been created on the basis of information provided by third-party sources that are believed to be reliable, but Lincoln International has not conducted an independent verification of such information. Lincoln International makes no warranty or representation as to the accuracy or completeness of such third-party information.
The Lincoln ESDI should not be construed as an offer to sell or buy, or a solicitation to sell or buy, any products which refer to the Lincoln ESDI. The use of the Lincoln ESDI in any manner is not endorsed or recommended by Lincoln International and Lincoln International is not responsible for any use made of the Lincoln ESDI, and use of the Lincoln ESDI is by permission only via a Data Usage Agreement with Lincoln International. The Lincoln ESDI must not be used to: (i) determine the amount payable under a financial instrument or a financial contract or the value of a financial instrument; or (ii) measure the performance of an investment fund with the purpose of tracking the return of the Lincoln ESDI or of defining the asset allocation of a portfolio or of computing the performance fees (within the meaning of the EU and UK Benchmarks Regulations). Lincoln International does not guarantee the accuracy and/or completeness of the Lincoln ESDI and Lincoln International shall not have any liability for any errors or omissions therein. None of Lincoln International, any of its affiliates or subsidiaries, nor any of its directors, officers, employees, representatives, delegates or agents shall have any responsibility to any person (whether as a result of negligence or otherwise) for any determination made or anything done (or omitted to be determined or done) in respect of the Lincoln ESDI and any use to which any person may put the Lincoln ESDI. Lincoln International has no obligation to update the Lincoln ESDI and has no obligation to investors with respect to any product which refers to the Lincoln ESDI. Any investment in such a product will not acquire an interest in the Lincoln ESDI. Lincoln International is not an investment adviser and will not provide any financial advice relating to a product which refers to the Lincoln ESDI. Investors should read any such product offering documentation and consult with their own legal, financial and tax advisors before investing in any such product.
© 2024 Lincoln Partners Advisors LLC. All rights reserved. LINCOLN SENIOR DEBT INDEX, LINCOLN EUROPEAN SENIOR DEBT INDEX, and LINCOLN INTERNATIONAL are service marks owned by Lincoln Partners Advisors LLC and its affiliated entities. Any use of these service marks and these materials, including the reproduction, modification, distribution or republication of these materials, without the prior written consent of Lincoln International, is strictly prohibited.
Contributors
I find immense fulfillment in enabling clients to achieve their objectives and navigate the complexities of today's ever-changing landscape.
Chris Croft
Managing Director & Co-head of Transaction Opinions
New York
I enjoy sharing insights about market and valuation trends with my clients, while also leading a differentiated and high-touch process.
Brian Garfield
Managing Director & Head of U.S. Portfolio Valuations
New York
I enhance my clients’ decision making and governance processes by providing independent and objective financial advice in a highly responsive manner.
Chris Gregory
Managing Director & Co-head of Transaction Opinions
New York
I enjoy the opportunity to provide clients with insightful and unbiased advice that will help them make the most informed decisions possible.
Ron Kahn
Managing Director & Co-head of Valuations & Opinions
Chicago
