Private debt funds are increasingly looking to differentiate themselves in the mid-market corporate lending space by providing looser documentation, offering cheaper pricing and exploring unconventional territories as they continue to find increasing success in the European market, according to a report from advisory firm Marlborough Partners.
Overall, 2016 was a positive year for the European private debt market as funds continued to gain market share. “Funds continue to take market share from banks as the unitranche product continues to penetrate the market,” the report said.
In addition to competing on term structures, funds are increasingly looking to larger transaction sizes to attract borrowers. The report, titled The UK Mid-Market Quarterly Snapshot Q4 2016, stated that there are eight direct lenders within the European market capable of providing loan sizes above €250 million.
But funds are under pressure to distinguish themselves and are looking at firms with a lower EBTIDA and moving into new geographies, according to the report. And with lower return hurdles deals are being priced at LIBOR +450 with no floor meaning they are encroaching on the banks’ market, the report said.
With the capacity to be the sole lender on a transaction it means sponsors can avoid the unwieldy situation of working with multiple parties. Approximately 75 percent of mid-market loans were completed last year by one or two parties, a 6 percent increase on 2015. And the unitranche product continues to increase in popularity as 41 deals using the instrument were finalised, significantly up on previous years.
The European levered loan market also saw a boon last year with volumes increasing by 11 percent (€3.1 billion). This was driven by many opportunistic recapitalisations and refinancings across 2016 as borrowers took advantage of the high amount of liquidity available in the European market. Total leverage was 5x, although first lien leverage rose to 4.5x, the highest in Europe since 2007.
Meanwhile the high yield market suffered a 17 percent drop last year compared with 2015, as it continues to lose ground to leveraged loans increasingly offering cov-lite packages.
Romain Cattet, partner at Marlborough Partners, said: “Over the last 12 months the leveraged loan market has evolved significantly. We are going through the most ‘borrower friendly’ period in the history of leveraged financed with even more flexibility, lower yields and higher leverage multiples than those experienced in 2007. The amount of available liquidity is such that some deals are now repricing less than six months after completion.”