The historically notoriously bank-led Nordic leverage market continues to see an ever increasing volume of credit fund deals being executed in the region. Specifically, 17 significant deals were completed with alternative lenders during the 12 months to 31 March 2018, up 31% on prior year. The majority of this growth came from Sweden, where non-bank deal volume almost doubled. Across the Nordics and the rest of Europe, unitranche continues to be by far the most popular credit fund product.
So why are these alternative lenders beginning to gain traction in the Nordics? Borrowers and equity investors cite a number of reasons, including:
- Covenant flexibility – fund packages typically have fewer covenants, with these covenants also having more headroom / less teeth
- Higher leverage – alternative lenders provide higher debt quantums than the clearing banks, which can significantly improve returns for equity investors
- Single lender – credit funds will typically invest bilaterally, with the capacity to write standalone cheques of up to €300m in certain cases. This removes the need for more complex pre-formed clubs
- Interest only – the debt is interest only, keeping more cash in the borrower which can be used for growth initiatives (or indeed to pay down debt)
- Speed – these lenders can execute deals (and subsequent bolt-ons) very quickly given their flat reporting structures
However, this extra flexibility does come at a price with unitranche debt typically priced 2-4% per annum higher than leveraged clearing bank debt. Stretched senior credit fund debt however is priced only 1-2% per annum higher and retains most of the aforementioned flexibility.
Unlike other areas of Europe (i.e. UK, France, Germany etc), the Nordics has so far seen a relatively modest market penetration from alternative lenders, albeit growing very quickly. In the UK for example, private debt accounted for c. 50% of mid-market leveraged loan deals.
In the Nordics, and Sweden in particular, the corporate bond market has also been an attractive source of funding, especially for smaller deals in contrast to other European markets. Nevertheless, credit funds have taken market share from the bond market too which is viewed as an increasingly uncertain source of funds and where the interest spread continues to rise. It should also be noted that the credit funds can be particularly creative and satisfy unique needs in a competitive auction as well as also underpinning value in sales processes when providing soft staples.
In conclusion, at Livingstone we would advise prospective borrowers to maximise optionality in a debt raising process and to therefore approach banks and funds (and if appropriate the bond market also). It is our belief that only with the full range of options can borrowers make the most informed decisions. Contact us if you wish to discuss your current financing needs.