Banks Go Deft in Loan Market to Keep Private Lenders at Bay

(Bloomberg) -- Banks are devising new loan structures and playing on their ability to provide revolving credit lines, as they redouble efforts to compete with funds that are encroaching on lending to Europe’s medium-sized companies.

To keep a slice of the lucrative mid-market, where loans can pay interest of over 4%, banks have already formed partnerships with some of these direct lending funds and have shared financing mandates. While some are leaning heavily on relationships with private equity firms, others such as Deutsche Bank AG have chosen to set up their own private debt team.

"We’re trying to be agile, internationally focused and creative, and turning the competition emerging from debt funds into an opportunity is part of that," says Graeme Strommen, global head of middle market financial sponsors at HSBC Holdings Plc.

If their tactics don’t succeed, banks face the possibility that lending in Europe’s mid-market could follow the path of the U.S., where banks have been all but elbowed aside and funds dominate.

Revolvers at Dawn

Debt funds in Europe took a larger share of Germany’s mid-market lending than banks for the first time in the first half of 2019, according to advisory firm GCA Altium. In the U.K., the cradle of European direct lending, debt funds are now providing almost half of all mid-market leveraged loans, according to a study by AlixPartners.

Banks Go Deft in Loan Market to Keep Private Lenders at Bay

When Varde Partners bought a majority stake in trustee services firm Equiom earlier this year, the incumbent banks managed to keep a small slice of the term loan even after the new owner brought in direct lenders Alcentra Asset Management Ltd. and KKR & Co Inc. to do the bulk of the roughly 150 million-pound ($183 million) debt.

This week, a new 331 million euro debt financing for Alanta Health Group emerged with a super-senior term loan from two banks and a unitranche from EQT Credit. Unlike similarly layered bank-fund debt packages, here the two facilities are separate and the fund would retain control over key decisions if the company were to run into trouble, according to a source close to the deal who asked not to be identified.

In July, a group of banks provided about 190 million euros of super senior and revolving loans to U.K. telecommunications firm Daisy Group. That loan refinanced the cheapest portion of another 1 billion pound financing from Ares Capital Corp. As a result, Ares’ return on the deal has improved, and the banks are now selling services that the private credit firm may have no interest in providing.

By providing the cheapest and most senior debt in such transactions, banks can maintain a relationship with the company and earn fees from broader banking services, analysts said.

"Among the direct lenders, there’s only a very limited number that can do anything around ancillary facilities,” said Scott Boothby, head of leveraged markets at Commerzbank AG. Banks are "starting to be more aware of the value" of these additional services, he said.

Lender Test

Banks’ share of the mid-market in the U.S. stands at around 10%, in line with data on the syndicated loan market from LCD, which is part of S&P Market Intelligence.

Banks Go Deft in Loan Market to Keep Private Lenders at Bay

While there’s no indication that banks in Europe would eventually end up with such a small slice, both Commerzbank’s Boothby and HSBC’s Strommen expect non-banks’ market share to increase.

“Every bank in the leveraged space – whether in the small cap, mid-market or lead left is impacted by alternative and direct lenders,” says Boothby.

An economic downturn could also lead to a shake-out in the roles of banks and funds. In the U.S., the last financial crisis put banks on the back foot and gave direct lending funds their opportunity to step in. A future spell of credit stress and tight liquidity would test how resilient this new generation of lenders are.

“The majority of direct lenders in the U.K. and Europe are relatively new, having emerged after the financial crisis, and the unknown factor is their ability to manage deteriorating assets in any future cyclical downturn,” said HSBC’s Strommen.

©2019 Bloomberg L.P.

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