July 2, 2020 / 2:25 PM / a month ago

Direct lenders turn on firepower amid Covid jitters

LONDON, July 2 (LPC) - Direct lenders are turning on their firepower to provide financing for European companies, taking advantage of market jitters caused by Covid-19 in the leveraged finance market.

Despite the loan and high-yield markets gradually reopening, with the launch of a couple of jumbo buyout financings for ThyssenKrupp Elevator and Spanish telecoms company MasMovil, the markets have not fully recovered to syndicate deals with competitive terms, as seen prior to the pandemic.

As such, it has created a great opportunity for private debt funds to pick up larger borrowers, which are in need of liquidity to keep business afloat.

“Clearly, it’s an unprecedented opportunity for direct lenders to further disintermediate the investment banks and entrench themselves as an alternative option for larger transactions now, as the bond and loan markets are still in recovery,” said Floris Hovingh, partner and head of alternative capital solutions at Deloitte.

Bankers admitted direct lenders are increasingly looking into larger borrowers in the term loan B market, rather than just focusing on €150m-€300m debt deals in the middle market.

“There’s no doubt we have seen them sniffing around,” said a syndicated loan banker.

“When the pricing level of the syndicated loan market was at 350bp-400bp at the beginning of the year, direct lenders were struggling to find assets. But because the market now has moved towards close to 500bp, they find it a way more interesting pricing point.”

CERTAINTY AND SPEED

The key advantage for direct lenders in the current crisis is to provide much-needed certainty to borrowers.

“The Covid environment is acting as an accelerant for private credit growth. One of the great attributes of this market is we offer certainty in terms and our financings are not contingent on the ratings agencies, which are now quite hawkish,” said Craig Packer, co-founder of Owl Rock Capital Partners.

Owl Rock was one of the debt funds to join Ares Management providing a £1.875bn loan financing to the UK’s biggest independent insurance broker, The Ardonagh Group.

The largest-ever unitranche deal, announced on June 22, highlighted the depth of liquidity available from direct lenders.

MV Credit, which recently provided a loan facility for a private equity-backed company to refinance a bond, is also one of the funds to seize the market opportunity.

“We were familiar with both the credit and the sponsor, which meant we could execute the deal very quickly after the opportunity was presented to us,” said Nicole Downer, managing partner at MV Credit.

“Previously the bond markets had provided terms and documentation that we weren’t able to do. Those markets aren’t really open for business at the moment.”

DEEP POCKETS

Fundraising in private debt market has been booming over last few years, leaving them to sit on a record-high dry powder.

According to research company Preqin, direct lending funds focused on Europe raised US$32.9bn in 2019, 29% higher than 2018, and the market has US$53.3bn capital available for investment as of June 2020.

That has allowed direct lenders to place a bigger ticket in deals to compete with banks.

“When direct lenders are able to raise larger funds, it naturally follows to deploy larger amount of capital in a larger ticket,” Faisal Ramzan, partner at Proskauer Rose said.

In the near-term, as the coronavirus pandemic continues to weigh on the global economy, bankers believe the continued volatility in the leveraged markets will continue to benefit the direct lenders.

“I don’t think pricing in the syndicated market will go ever back to the level that will make private lenders completely uncompetitive,” said the syndicated loan head. (Editing by Christopher Mangham)

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