Could your next lender be a direct lender, rather than a bank? According to recent market analysis, funds now account for half of mid-market term lending. In fact, if current trends continue, this ‘private debt’, provided by non-bank institutions, will overtake real estate as the third-largest alternative investment class after hedge funds and private equity.
Who accesses direct Lending?
Borrowers who might historically have looked to a syndicate of banks for leverage are increasingly embracing the concept of unitranche loans. Here a hybrid of senior and junior debt offers an average cost of debt and avoids multiple sets of documentation and covenant reporting.
Similarly, financial sponsors, who often look to move quickly and to avoid obtaining multiple credit approvals, are increasingly looking to bilateral fund deals, rather than to a club of banks, when external funding is required. They also benefit from the increased leverage which is often available from direct-lenders. This can enable higher bids to be made in competitive scenarios.
What sorts of deals are relevant?
Deal Trackers have demonstrated a move by direct-lenders into the space traditionally occupied by syndicated loans.
Unitranche lending has historically been the preserve of mid-market corporates, with an EBITDA of £50-£100m. However, the last few years have seen an increased level of capital raised by alternative lenders and, as such, the market is seen to be awash with liquidity. Direct lenders therefore have looked for alternative avenues to deploy capital, including expanding geographically and into lower-mid markets.
Whilst the Scottish market has a relatively limited number of mid-market corporates (some reports would put this at less than 50), there at least the same number again biting at the heels of this EBITDA level. One would think that Scottish market therefore has opportunities, particularly for sponsors seeking growth.
What terms are likely to be offered?
As a result of increased liquidity in the markets generally, borrowing terms available are becoming progressively friendly to borrowers, albeit margins have remained relatively stable.
Fund lenders are generally able to provide funding on a non-amortising basis, with more flexibility as to structure than banks are typically able to provide. They also boast an increased speed of execution and shortened credit processes, making them particularly attractive to sponsors.
Is there still a role for banks?
Funds, of course, are not able to offer the clearing services made available by banks and most struggle to provide revolving credit. There therefore remain opportunities for bank involvement in direct lending structures, whether through provision of RCF facilities or as arrangers providing clearing services, with the liquidity itself coming from alternative sources.
On May 29, 2019