Do banks still have a role to play?
“It’s important that they don’t disappear,” Juri Jenkner says. “Absolutely – someone has to do the revolver!” jokes Marc Ciancimino, to laughter from the assembled company. But the point is a valid one. Even if their ability to provide senior debt is limited, banks can still play an important role, offering services that boutiques and new entrants simply can’t provide, as Dagmar Kent-Kershaw acknowledges.
“There will always be a place for the banks. They can do things that we can’t,” she says. Whether that’s a revolver, trade credit or swaps, they are services that a firm like ICG can’t provide.
“The banks know that to really get the attention of a corporate, they’ll need to continue to lend or provide some sort of lending facility. They won’t completely disappear or step back, but they do want people like us to come in as it will help to protect their relationships,” she adds.
“If you’re a bank who used to write a £75 million ticket to lend to a corporate, but you’re now told by head office that you can only write £15 million to £25 million… what do you do to make up the shortfall? If you invite in the bank next door, they’re going to end up fighting you for the swaps business, for the M&A business, for the corporate relationship. It’s much better to invite one of us along, as we just want to lend – we’re not going to encroach on that bank territory. The banks would much rather invite a friendly lender than a direct competitor,” she explains.
That dynamic can skew returns somewhat. If a bank is going to reap fees from ancillary banking services, it traditionally can afford to price any debt it does issue at a lower rate. For private debt funds, who don’t have fee revenues to draw on, that means their debt will prove pricier.
Banks are less active in subordinated debt, where established mezzanine providers like ICG have long held sway. “For the last three to four years, the banks were pretty much completely disintermediated from the mezzanine business,” Jenkner says. “There are hardly any banks that underwrite mezz these days – maybe JPMorgan, or Goldman. Mezzanine has been a different theme, and a very interesting one from a debt fund’s perspective. It’s been super attractive to our clients and us for the last three years – we’ve completed about 30 high quality mezzanine deals over the last 30 months. It’s a niche market, it’s a small market, but the risk / return profile is very compelling. On the senior debt side, the investment opportunity is equally attractive, but the headline is very different – we still need the banks.”
Many private debt funds are now offering unitranche facilities – a hybrid form of debt which shares characteristics of both senior and mezzanine loans. AXA Private Equity has been particularly active in this segment, for example, providing more than €400 million in unitranche financing facilities to companies including Unither Pharmaceuticals, FDS Group and Biomnis. AXA PE claimed that represented more than two thirds of all unitranche issuance In France in 2011.
And banks are still playing in the senior space, albeit in smaller volumes. Yes, they face problems, but they’re not insurmountable, Rolles believes.
“I just think it’s maybe a question of the banks having to transform themselves a little bit. They have fantastic infrastructure; many departments are superb at lending; and there are certain areas like trade finance which are extraordinarily complex and the banks have many years of expertise there for example. But it comes back to cost of capital, which is maybe now relatively higher for certain banks than it is for some other investors. In these circumstances, some banks could start thinking about being a more of a conduit for external capital, rather than thinking about what they can do just in terms of their own balance sheet. Some institutions are moving in this direction.”
AgFe, for example, is working with a bank on a large deal. The bank is providing no capital – it will syndicate 100 percent of the position.
A relationship game
The importance of relationships may have been forgotten during the boom, but it’s something banks and sponsors alike have remembered, Ciancimino says. “I think if you roll back a few years, sponsors were quite happy to have a fairly diffuse group of rather passive lenders who they didn’t really have to talk to; the syndicate would be organised for them. The larger groups, who have had to get to grips with ‘amend-and-extends’, have realised that it is valuable to have relationships with your key lenders. In a way, things are going back to how they were 10 years ago, when there was a closer dialogue. The whole securitisation thing dulled what was a pretty relationship-driven business and maybe we’re going back, in a new form, to something more like that.”
“More than two thirds of deals that come our way have come direct from the sponsors,” Jenkner says. “It’s absolutely key to globally be close to them these days. That relationship is worth more than anything. Seeing deals early on allows you to be selective.”
Mundassery agrees that good relationships are key to effective origination efforts. “In the distressed sector it really matters. A lot of deals are bilateral deals. All the best opportunities come from referrals from our network of professionals – lawyers, financial advisors and so on – in our target markets.”
Rolles chimes in. “It’s interesting isn’t it? You’ve got relationships being more important, structures much less complicated; you’ve got credit being more visibly important again; you’ve got less reliance on, or trust in, third party agencies. All these things are rather old-fashioned. It’s almost like there’s been a retreat from the last ten years and going back to a much more straightforward market. It’s amazing how much has been forgotten.”
So while there’s plenty to keep market participants on their toes – big picture items like the wavering Eurozone economy, for example, or misguided regulatory measures – the opportunities for canny investors in private debt are compelling. Kent-Kershaw sums up the situation succinctly. “My concern is that the money from new sources comes in more slowly than the money that’s disappearing, creating a funding gap. But there’s a huge opportunity out there. There’s a lot to be done.”