Direct lending in general, and unitranche in particular, continues to make significant inroads across Europe. The offering has received a further boost from the relaxation on direct lending in France, Germany and Italy whilst the ECB guidance on leveraged transactions, which is expected to come into effect mid 2017, will hamper bank lending providing further impetus to direct lenders.
Initially unitranche structures competed mainly with traditional senior/junior structures; however, the ability and willingness of direct lenders to lend increasingly larger amounts means the offering now competes with the high yield bond market as evidenced by the recent £475m unitranche backing Bridgepoint’s acquisition of Zenith. At the smaller end, direct lenders are providing increasingly smaller tranches with Beechbrook’s €7.1m unitranche and equity co-invest indicating that all but the smallest deals are now within reach.
Geographically, direct lending continues its advance inside the three main markets (UK, France and Germany) while Scandanavia, Italy, Spain and Ireland are all seeing strong growth and demand for the product. Unitranche recently appeared on the radar in Asia in the shape of the $480m unitranche backing Carlyle’s bid for Australian based pharma company, iNova, so the product seems set to grow in those markets too.
Unitranche continues to evolve as a highly bespoke product offered in a wide variety of forms including; clubbed, bifurcated, “dual-tranche” and even junior unitranche, all of which seem to beg the question of whether the term ‘unitranche’ adequately describes these various structures. Direct lenders are being forced to develop a wider range of strategies and products in an effort to differentiate their offering from other providers and some are increasingly willing to offer undrawn facilities as part of the financing (q.v. the £50 million undrawn capex line provided by Goldmans as part of unitranche financing for Zenith).
Some funds have elected to ride the risk curve in search of higher yields whilst others have gone back to their roots in the mezz market and are using equity to enhance returns; a few are creating mezz funds through the back door. Traditional bank lenders, initially slow to recognise the challenge from thise new providers, have developed various strategies to partner up with direct lenders and are willing and able to provide the “first out” portion of unitranche.
Documentation continues to adapt to the myriad of structures in the market but liquidity in high yield bond market and the syndicated loan market is also having an impact on terms in the mid-to-larger unitranche-style deals.
The complex nature of these structures means that Intercreditor issues have become a key negotiating area for lenders and borrowers, however, the evolution of US-style clubbed (and syndicated?) deals has introduced a further complication via the introduction of the Agreement Amongst Lenders between the parties in some deals although some practitioners question whether these AALs are necessary.
Last, direct lender’s hurdle rates have prevented them from targetting more traditional, unleverage credits leaving a funding gap in the 400–550 bps space. With this in mind, capital formation is taking place to address this, hitherto, neglected sector of the market although providers are having to find other, traditional ways of meeting their target returns; such as warrants.
On the restructuring front, Unitranche has avoided the landmines so far. However the volume of issuance over the past few years means that defaults have occurred with ICG’s investment in Courtepaille the most high-profile restructuring to date but market chatter suggests other deals are already experiencing distress. The course considers how the market has and will address these issues.
Participants will receive various models (including a professionally designed LBO model which measures debt capacity and exit returns) along with a market report from Debt Explained on trends in the loan market.
The programme will review the impact of the draft ECB guidance on leveraged transactions and its potential impact on direct lending
Debt Finance and alternative lending streams form a huge part of the banking world. As such we offer a range of courses covering mezzanine and debt finance
Debt Training Course
Training Course Area
|Debt Finance||Mezzanine finance, junior debt, senior debt, PIK,|
|The Project Finance Course||Debt capital|
|Advanced Debt Restructuring||Fundamental concepts in early problem loan workout|
|Leveraged Loans in Private Equity and Corporate Transactions||Get an overview of the market trends affecting corporates and PE borrowers|
|Infrastructure Project Finance Course||Debt finance, debt techniques, subordinated debt|