LONDON, Nov 29 (LPC) - An increasing number of direct lenders are launching a new generation of stretched senior debt funds that will compete with the syndicated term loan B market as they diversify strategies in a bid to put more money to work.
Direct lenders have identified an opportunity to replace syndicated loans with stretched senior lines, which are similar to first out-second out unitranches that saw banks and debt funds team up.
However, a stretched senior loan is provided by only one lender — a private debt fund. In these deals, the overall blended interest rate for the borrower is cut to 350bp-500bp, a similar pricing level to syndicated loans and less expensive than unitranches, which usually price at 550bp-650bp.
While a stretched senior structure is not new as direct lenders have offered them in the past, due to the relatively low yield of 3.5%-5% it was considered as a complement to unitranche lending, rather than a strategy in its own right.
Despite significantly lower yields, competition in the private debt market has forced fund managers and investors to compete for senior debt, including Ares Asset Management, Hayfin, Pemberton and Arcmont, the former credit arm of BlueBay Asset Management.
“Funds want to deploy more money, but there is currently a mismatch between demand and supply in the market, which is why they are pursuing different strategies,” Faisal Ramzan, partner at Proskauer Rose said.
Stretched senior funds are also gaining appeal as investors become more cautious about lending to companies in the current credit cycle and are happy to accept lower yields for lower risk.
At the SuperInvest 2019 conference, which was held in Amsterdam this month, 56% of attendees surveyed said that senior debt would provide the best risk-reward ratio of all direct lending strategies.
European banks’ have been limited by regulation forcing them to withdraw more and more frequently from mid-market transactions. New capital requirements implemented by EU law have turned mid-market lending into a risky business for banks because of capital reserves they have to put aside on a risk adjusted basis.
Direct lenders can be more flexible and give borrowers access to far more capital than they would historically have had access to.
“There are usually eight banks involved in a syndicated loan deal. Sometimes there are seven banks available and one partner is missing. In that case a private debt fund has the chance to operate as the eighth lender,” Robert von Finckenstein, managing partner at Alantra Germany said.
A senior market participant said: “The origination of a private debt deal is very time consuming and cost intensive. Therefore, funds are reluctant to lose it (to the TLB market) and would consider a stretched senior loan as an opportunity to eventually participate.” (Editing by Christopher Mangham and Claire Ruckin)