The Debt Connection – April 2016

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Market uncertainty surrounding a slowing global economy, instability in oil prices and political events – such as a possible UK exit from the European Union – has created nervousness around the high yield bond markets. In comparison, the banking and alternative lender markets have remained open due to the following:

1. Bank appetite remains
Banks are being targeted to increase lending and improve income levels in order to drive shareholder returns. This is particularly prevalent in the UK where government pressure remains.

2. The continued growth of the “alternative lender” space
This is made up of direct lending arms of insurance and pension companies, along with asset managers, specially formed debt funds and hedge funds. The private nature of the direct lenders means that they are less susceptible to short-term market volatility and so are, and hopefully will remain, open for business. Interestingly, the high hold levels offered by the large direct lenders means that the private debt market is becoming a viable alternative to the bond route for larger borrowers as well.

We have seen terms improving for borrowers and 2015 saw the banks fighting back against the market share gains being made by the direct lenders in the mid market. A recent survey by AlixPartners highlighted 111 unitranche deals were signed in 2015, compared with 69 deals the previous year. Also, conventional senior debt accounted for 62% of total deals in 2015, down from 70% in 2014. This competition means pricing has edged down and typically covenants are fewer with more headroom but differences between the European and US markets have also become apparent, with US lenders indicating a floor in pricing that they aren’t prepared to go below.

Unitranche is a hybrid debt product made up of senior and junior debt. It is a term loan that typically has a bullet repayment on maturity, rather than amortising over the term of the loan. It is often more expensive than senior bank debt but a higher leverage is available. Unitranche is typically provided by direct lenders which are keen to lend, have a comparatively fast process and can provide more bespoke covenants packages.

There has been a proliferation of unitranche across Europe, with unitranche penetrating new markets such as Holland, Benelux and the Nordics. There has also been an increasing number of direct lenders in the UK targeting the regional market. This spread is from UK-based and pan-European funds dedicating specific resource to new territories and also the opening of sales offices in certain situations. We expect to see this continue as the market grows, but also as lenders seek to improve their returns for investors. This brings new funding options and improved flexibility to many businesses.

During 2016, we expect continued growth in market share of the direct lenders as they look to deploy funds which have been recently raised. The relatively scarce deal flow that has already been evidenced so far this year means competition between all lenders is intense as they focus on deploying funds, income growth and investor returns. This makes the current environment highly attractive for businesses looking to refinance existing debt or raise new funding for growth and acquisitions.

Clearwater International expands its Debt Advisory coverage
Clearwater International sees the range of funding options available to borrowers continuing to improve going forward, and so has further invested in our Debt Advisory team with the appointment of Joe Dyke as a director in the UK. Joe joins Clearwater with over 15 years’ experience of advising management teams on strategy and fundraising, having most recently worked at Grant Thornton and RBS.

Clearwater’s investment in the debt advisory team follows an increasingly busy period, with 16 transactions completed in the UK in 2015. The team now has senior representation across the UK and continental Europe, and expects to see transaction activity levels continue to grow.

Mark Taylor, Head of Debt Advisory at Clearwater International, said: “We are particularly pleased to be strengthening our Midlands presence with a senior Debt Advisory professional. Joe brings with him a wealth of experience and is a great addition to the Clearwater team.”