Why use a debt advisor

Nearly a decade since the financial crisis struck, the European funding market has changed significantly and the debt market has grown exponentially, with hundreds of new alternative lenders now ready to finance company growth plans. This environment has in turn created a part for debt advisors who can play an integral role in guiding company owners through this complex range of choices when it comes to determining a suitable capital structure for their needs.

The funding market remains one of two halves. Since the economic crisis large companies have been generally seen as safe havens by lenders with a flight of capital to quality and size.

By contrast, smaller companies have continued to face greater challenges in terms of raising finance. As such, alternative lenders – a catch-all term describing a wide range of non-bank institutions – are busy trying to enter this space, and in so doing financing ever larger deals while also deploying different structures.

Leading accounting and boutique corporate finance advisory firms are growing their teams in this space and competing with traditional investment banks by offering a full range of debt advisory services.

The central role of a debt advisor is to help companies identify the best capital structure for a particular business and its shareholders, and then optimise the debt package and the source of that funding.

Debt advisors can also:

  • help companies develop business plans and analyse investment projects
  • assist businesses in identifying key risks as they develop optimal structures of financing
  • organise competitive lender selection processes enabling clients to raise the optimal finance structure in a timely manner
  • negotiate debt terms and help business owners understand movements and risks in debt markets

Funding options

There is a vast range of funding options for companies looking to secure new investment or to restructure existing loans. These include: senior bank debt; syndicated and club deals; unitranche; bond issues; private placements; bridging finance; junior financing; senior stretch; and securitisation.

We are seeing increased cooperation between alternative lenders and banks. Banks are partnering with funds, providing super senior and senior ranked facilities. Indeed, a number of banks and alternative lenders have recently created formal and informal partnerships to create packaged finance. For instance, The Royal Bank of Scotland formed a joint venture with asset managers AIG, Hermes and M&G.

Rise of debt funds

Debt funds are taking an increasingly large slice of the mid-market. One of the attractions of this funding model is that larger firms are able to underwrite a single tranche of debt and provide a speedier alternative to bank clubs or the bond market.

As the market has rapidly matured there has been a notable increase in the suite of financing options that a debt fund will offer, such as first-loss second-loss structures and senior stretch. Funds are also increasingly willing to take minority positions and co-investments as they look to differentiate themselves from their competitors.

The specific terms that a debt fund would offer very much depends on the size of the business in question and the risk. For a unitranche loan the terms would typically be 600-900 basis points (6-9%) above a LIBOR floor, while the terms would have up to three financial covenants based upon the size and risk of the transaction.