There was a time when borrowing was relatively straight forward. A corporate treasurer would call a relationship bank and arrange a loan in relatively short order. However, they might have felt obliged to buy from their banks ancillary products – interest rate hedging perhaps. This was how the banking model over the last few decades worked in Europe.
Now, corporates have more choice: UK banks (although international banks have retreated to their domestic markets); a small number of large institutions with long experience in non-bank lending; and, increasingly, a newer pool of direct lenders, some of which have a heritage in private equity.
While a more diverse set of funding sources is always good, how should a borrower choose between the different types of non-bank lenders? We have identified four considerations.
First is terms and conditions, because, for a lender with no ancillary business to cross-subsidise the loan, it is all about credit quality. That means a borrower should be asking whether a lender can offer capital in the right currency, with the right maturity, at the right overall cost, whether fixed or floating, and with reasonable terms and conditions for both parties. Both the leveraged finance and private placement markets have their place but, for companies without private equity sponsors, private placements seem to be a much more comfortable and successful fit.
The next consideration is whether a borrower wants external advice on the lending options available. With more choices for funding, there is a question whether a borrower’s relationship bank or an external party such as one of the ‘Big Four ‘debt advisory teams or a similar debt advisor is a better course to take. In theory, the debt advisor will be more independent.
Third is the lender’s capacity and resources. Does the borrower need to create a club of non-bank lenders, or do they need to use an arranger to syndicate the proposed debt, or can one non-bank lender provide all the required financing? Also a key question is the staffing of the lender, so that, if discussions are required during the life of the loan, the borrower knows that these will be conducted with people with the right experience and skills to reach on a sensible solution.
One of the key considerations is the level of due diligence to be done by potential lenders. From our experience, doing site visits and a number of meetings with key senior executives is appreciated and help to build a relationship, and gives a better understanding of business compared to a one hour face-to-face roadshow meeting, as happens in other forms of fund raisings. This is very much so for private companies.
In summary, we believe that other than quantitative measures such as pricing, maturities and terms and conditions, the decision can be as much about the people as a potential lender. Just like relationship banking in fact.
Mark Hutchinson is head of alternative credit at M&G Investments and is based in the group’s London office.