Learning to adjust

Alternative asset management professionals rarely hound conference speakers for autographs, but such was the case at ACG Intergrowth Las Vegas.

Sponsors, lenders and service providers gathered in the desert city in late April to network and learn more about the mid-market deal climate, but most were willing to put sales pitches and termsheets aside to hear Super Bowl-winning quarterback Peyton Manning relay his thoughts on leadership during a keynote address that capped Intergrowth’s event calendar. At least one attendee at PDI’s table brought a football along, in the hope that Manning would make time for autographs after his remarks.

“It’s usually the mental, not the physical, toll that pushes players away,” said Manning, who won his fifth MVP last year at the age of 37, two years removed from a neck surgery that threatened his career. “My passes aren’t the same as before my injuries, but I learned to adjust.”

Though most lack Manning’s gift for threading a perfect spiral pass through the defence, many mid-market lenders possess a similar willingness to adjust to what can’t be controlled. The years following the financial crisis were defined by dramatic shifts in banking regulation, shaky M&A markets and record-setting investor demand for private debt products (thanks largely to the diminished yields offered by traditional fixed income allocations). Alternative asset management firms responded by launching bigger debt funds, floating business development companies in the US and designing new loan products better suited to borrowers than those traditionally offered by banks.

The result prompted a refinancing boom, driven at least in part by a spike in borrower enthusiasm for unitranche loans, which combine senior and subordinated debt into a single instrument. Borrowers pay an interest rate that falls somewhere between what is typically paid for subordinated and senior notes.

“There’s a big preference to go with guys who can underwrite a whole deal,” Cowen & Company co-head of debt capital markets Len Sheer said, while leading a discussion on mid-market lending. He added that reaching out to four to five lenders for a single deal creates “too much risk”.

It was a sentiment echoed by at least one executive in attendance: “As a borrower, I’d rather have a problem with a unitranche provider. At least you know your partner.”

That sentiment has carried over into the UK and Europe, where Alcentra managing director Pascal Meysson posited that a recent warming in bank-fund manager relations may have been a response to unitranche’s growing popularity. As recently as six months ago, European banks were reluctant – or downright unhelpful – in assisting fund managers seeking traditional financing partners for their borrowers, according to panellists at Private Debt Investor’s first anniversary party, held last month.

That reluctance, however, may have been for good cause. As of June 2013, there had yet to be a bankruptcy in which a unitranche loan has played a part, according to a Paul Hastings report. As such, it remains unclear as to how these loans will fare in a bankruptcy court if and when the economy hits another rough patch, prompting an increase in defaults.

“Case law involving intercreditor agreements should be helpful, but unitranches are put together differently than two lien or senior/mezzanine debt,” according to the report. “Because borrowers are not party to most AALs [agreements among lenders], bankruptcy courts very well may determine that they have no jurisdiction to enforce them.”

With legal issues pertaining to their treatment in bankruptcy still in question, it’s unsurprising that European banks would take their time to partner with fund managers – many of which are relatively new entrants – on unitranche loans. Like all lenders, however, they will likely find a way to adjust.

“My biggest challenge every year is adjusting to the youth of our new players,” said Manning. “Last year, one of our rookies was kind enough to tell me that he was four years old when I was a senior at the University of Tennessee.

“I didn’t throw him a lot of passes.”

If the comments at PDI’s anniversary party and Intergrowth provide any indication, last year was a tough one for rookies. Perhaps the remainder of 2014 will offer them a warmer reception.