Feb 23 (LPC) - Banks’ share of the middle market leveraged buyout space is under threat from direct lenders increasingly expanding their role to underwriting working capital facilities in unitranche loans.
As funds sit on a record amount of dry powder many are using the deeper pools of capital and large infrastructure to underwrite the revolving credit facility, a role usually reserved for the bank.
“We’ve seen this happening occasionally. It’s something a direct lender may want to do to secure their position and then perhaps work with a relationship bank to provide the first lien and/or undrawn lines such as an RCF,” said Ian Tetsill, managing director, structured finance at Barclays.
A typical unitranche includes a direct lender providing the term debt and undrawn facilities such as capex and acquisition lines, while the bank finances the RCF.
Sponsors benefit from securing the financing early when direct lenders underwrite the RCF and then finding a bank to take the paper after the agreement, but it is not without the risk.
“Unitranche providers are not always fully sensitive to the needs of banks and this has lead to certain parts of the deal requiring tweaking post-closing, which is something that is both frustrating and costly to the sponsors,” said Henning Tietjen, head of debt funds at structured finance at Berenberg.
“Therefore it can be in the interests of all parties to come together early.”
The trend is driven by funds not wanting to lose a deal to a competitor that is willing to show flexibility, handing an advantage to larger funds with the ability to underwrite RCFs.
Faisal Ramzan, partner at law firm Proskauer, said: “At the moment they don’t want to run the risk of holding up a deal and borrowers typically want the whole spectrum of ancillary products that come with a bank revolver.”
Lenders, however, are split on whether to hold and manage the RCF following the deal close or to syndicate it to a bank.
ICG, which recently backed private equity firm Silverfleet’s acquisition of tour operator Riviera Travel, underwrote the bonding line required by regulators to protect tourists, said it is content with holding such facilities on a permanent basis.
“Fundamentally, we’re trying to increase the sophistication of our product offerings so that we can provide a comprehensive one-stop solution,” said Max Mitchell, head of direct lending at ICG.
However, David Hirschmann, head of private credit at Permira Debt Managers (PDM), said he doesn’t expect underwriting RCFs to be part of a long-term strategy for direct lenders.
He said: “Underwriting the working capital facility is still only a small minority of cases, and I don’t see that changing.”
PDM recently provided the working capital facility as part of the refinancing of Dutch powdered food manufacturer Prinsen and its acquisition of Berning.
“Private debt funds provide long-term capital which is not meant to be drawn and repaid within a few months” Hirschmann said. (Editing by Christopher Mangham)