Partners, or rivals?

For the past few years, banks and private debt firms have been circling each other warily. They’ve done deals together of course, but the sense is there’s been a lingering suspicion amongst the traditional lending community, particularly in Europe, that such firms are chipping at banks’ market share.

Yet January brought another tie-up between an alternative lender and an investment bank. So does this represent a change in the relationship between both types of lender?

The arrangement between BlueBay Asset Management and Barclays follows the announcement by GE Capital and Ares Management of a joint venture which launched last year. In that instance, however, the pair launched a vehicle they co-sponsored, whereas BlueBay and Barclays have simply signed an agreement to work together on selected UK deals. 

It is however noteworthy because it suggests banks are really starting to take notice of private debt funds, even if they don’t fully understand whether they represent a welcome addition to the market, or a threat.

Anthony Fobel, a partner and head of private lending strategies at BlueBay, spoke to Private Debt Investor about the deal. Asked about banks’ changing attitude to funds of his ilk, he responded: “It’s a difficult one for banks. They don’t really know what to make of alternative lenders. Are we partners or competitors? Are we even relevant?”

Some banks are no doubt concerned they’re losing out to unitranche providers, who are able to push leverage multiples beyond a level banks feel comfortable with. They’re missing the chance to underwrite and also provide ancillary services to borrowers.

“Barclays realised they could work in partnership with us, to everyone’s advantage,” Fobel added.

The mechanics of any deal under this arrangement are interesting: while the borrower receives a single loan, the debt comprising the unitranche package is diced to meet the differing needs and appetites of the two lenders. So Barclays underwrites a lower risk tranche, at a lower margin, while BlueBay takes the higher risk tranche at a higher margin.

Significantly, BlueBay also controls the loan in the event something goes wrong. If there is a default, or distress, BlueBay can restructure the loan and only right at the end of any process would Barclays step in (even though it is first in line for any repayment).

Other private debt fund managers PDI spoke to agreed the deal made sense for both parties, although some felt Barclays had more to gain than BlueBay. While BlueBay will obviously benefit from the broader origination platform Barclays offers (Fobel again: “The biggest challenge private debt funds face is finding deals”), the additional firepower it brings (enabling it to target bigger deals), and the greater certainty of execution, Barclays gets to tap into a whole segment of deal activity that it otherwise wouldn’t have access to.

This last point really is a key one. Thanks to the raft of post-crisis regulations, banks are constrained as to the type of deals they can underwrite. They are still lending, but only to industries they know well and at more modest leverage multiples. They’re also increasingly parochial in geographic terms.

As a result, they’re missing out on a whole slew of deals that private debt funds are merrily piling into, able to finance them due to their greater flexibility and appetite for risk. For a bank, losing out on an underwrite isn’t too painful, but the lost opportunity to market all the ancillary services they provide really is.

Karl Nolson, hard of debt finance at Barclays, also spoke to PDI about the deal. He argued the banking community had actually met demand for debt financing over the last year or so, without the need for additional liquidity from alternative lenders.

That hasn’t stopped Barclays engaging with that community, however, and doing deals featuring private debt funds. “Typically, on deals where we’ve worked with alternative lenders we’ve provided a super senior revolver and they’ve done the term debt,” Nolson explained.

The bank’s move into unitranche was predicated on a desire to tap into more deals, and provide more bespoke solutions to sponsors. “People love the flexibility that unitranche provides. We’ve been working with BlueBay a long time, and joining together for a genuine unitranche product was a natural evolution. The super-senior piece and term debt are contained in one contract, and the intercreditor terms are already drafted, which really speeds things up. It’s a bullet structure with no amortization, which means more cash is left in the business. That in turn improves the serviceability of the debt, so we’re able to provide between half and a whole turn of additional leverage compared to a typical bank club structure.

“The pricing is slightly north of a straight senior club, but a lot a less than stretch senior plus mezz, for example. When you factor in the additional flexibility and speed of execution, it’s a very attractive proposition that has been well-received by the sponsor community.”

From Barclays’ perspective, it’s another string to their bow. “It’s complimentary to our existing senior debt offering,” Nolson says. “It allows us to lend more to UK businesses and to provide solutions to those businesses more quickly.”

From a practical standpoint, how does the deal selection work in practice though? Who decides whether a deal is funded by bother parties via their unitranche product, or individually? Nolson explained that the decision lay with the borrower. Once a discussion is initiated with a sponsor for example, whichever party (BlueBay or Barclays) is at the table will suggest the most suitable financing solution for the situation. If that happens to be unitranche, then the other half of the pairing will be brought in and the deal will proceed accordingly.

This deal then is a neat solution for both parties. Interestingly, Barclays is not the only bank that’s been in discussions with a private debt firm. BlueBay had been approached by other lenders before choosing to partner with Barclays, and rival firms have also explored similar partnerships with the banking community (aside from those already agreed like GE and Ares). Lloyds Banking Group, for example, is in discussions with four or five private debt funds regarding a similar unitranche tie-up.

You can be sure further partnerships will follow, demonstrating that far from being rivals in many cases, bank and private debt funds can co-exist and work together to mutual advantage.