Shadow Banks' Growth Backed by Offering Bespoke Leveraged Loans

(Bloomberg) -- Alternative lenders are offering U.S. leveraged borrowers a greater choice of debt than banks, and that’s helping support their growth, according to William Wagner, a partner at law firm Venable LLP with more than 20 years’ experience of the loan market.

Through being able to offer a new approach to loans, such lenders are better able to compete with the more established leveraged loan product offered by banks, he said.

The shadow banking sector, which includes boutique banks, private-equity investors and other financial firms, “have demonstrated a unique flexibility in their approach to providing credit structures," Wagner, who is part of Venable’s corporate practice, said in a Sept. 21 phone interview. “Alternative capital providers are here to stay.”

Lending by alternative providers stepped up after U.S. regulators started curbing big banks from providing riskier loans in 2013. The restraints have since then been eased though many expect such lending to continue to increase. One lender, Ares Management LP, estimated borrowers raised $365 billion in U.S. middle market loans last year, according to an April 2018 report.

Bespoke terms that may be offered by an alternative lender include the following, according to Wagner:

  • Fee structures that may benefit the lender, but also provide a funding benefit to the borrower in the near term
  • Revenue sharing arrangements when the borrower is at an early stage in its development
  • The "ability to entertain or put into place deals that were not quite the same vanilla structure we had before"

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