News analysis: Win-win?

Italian bank Intesa Sanpaolo and GSO Capital Partners, the credit arm of Blackstone, announced a strategic lending partnership in late March. The initiative aims to finance Italian mid-market borrowers with turnover of between €80 million to €350 million, Giovanni Gilli, head of Intesa’s Capital Light Bank, told PDI

The final details have not been fully hammered out, he said, but the bank has a strong pipeline of existing clients that it can refer to GSO. Deals will be struck on a case-by-case basis and the partnership will focus on both existing Intesa Sanpaolo clients as well as the wider mid-sized corporate space in Italy.

As Intesa’s mid-market customers need refinancing, it will decide whether they are suitable to be referred to GSO, explained Paulo Eapen, a managing director with the US-headquartered lender who is working on the tie-up. GSO will then do its own credit work while Intesa will ultimately manage any loans made. GSO is seeking to lend between €20 million and €75 million to sub-investment grade Italian corporates. The firm is also eyeing larger deals, but Eapen said that those would likely be sourced outside the Intesa partnership. 

The firms do not intend to establish a formal joint-venture, and Intesa will not be putting its own balance sheet to work in the loans. 

Asked whether Intesa would earn a finders’ fee for sourcing loan opportunities from its own client base, Gilli said the details were not finalised but that it was the likely approach. Eapon declined to comment on potential fees but acknowledged that there would have to be more to the deal than just opening their client list to GSO to make it worthwhile for Intesa. 

Both partners declined to specify how many deals are expected to get done or how much capital they anticipate will be deployed via the partnership. 

WHAT’S IN IT FOR YOU?

For GSO, the opportunity is to gain access to a rich seam of capital-starved borrowers in a market that was until recently, notoriously hard for non-bank lenders to penetrate for a variety of legislative and regulatory reasons. Those blocks have now been cleared, though the path to Italian lending is not entirely smooth, according to Eapon. 

“From an origination perspective, it would be a a difficult market to access without Intesa. So we are looking to benefit from Intesa’s incumbency and relationships, and offer another source of capital for that standard corporate mid-market borrower, in the sub-investment grade space.” explained Eapon. 

As well as capital, GSO can offer borrowers a bespoke product with higher leverage and bullet structure options available, he added. 

Intesa has struggled with the pressures on capital providers that have hit the whole Italian banking sector and last year announced that it would move €46 billion worth of bad assets onto the balance sheet of a newly formed entity, Capital Light Bank. Cutting lending means potentially damaging profitable client relationships. By inviting GSO in, Intesa can hang onto the revenue-rich ancillary services that alternative lenders cannot provide corporate borrowers, Eapon said. 

It should also mean a healthy fee income minus the drag of setting aside expensive capital – an entirely capital light approach. The market is changing and the bank has recognised this, Gilli said, insisting that Intesa will continue to lend itself. “This is not a substitution of our role as a leading financial entity in Italy, it is in addition and to provide synergies [for our clients],” said Gilli.

Gilli explained that the partnership discussions with GSO started well before he took on his role at Capital Light Bank, and that the new partnership is wholly focused on new lending, not the sale of legacy assets.

KEY TO SUCCESS

This kind of bank and debt fund partnerships has the potential to be successful and beneficial for both sides. But that outcome is not guaranteed. Take the partnership between asset manager BlueBay and bank Barclays announced in January 2014, for example. To date, the two houses have done only one deal together.

Of course the difference between the BlueBay-Barclays tie-up and the new GSO-Intesa arrangement is capital. Intesa is constrained when it comes to lending, whereas Barclays is not. 

The fund-bank lending partnerships that are most likely to succeed will be those between banks that still have large networks and established relationships, but which have struggled under the weight of new regulatory restrictions on leverage and capital adequacy ratios.

Asked if GSO is eyeing other European markets for similar agreements, Eapon said the firm would think about Spain or Portugal also. “It’s a model that we can certainly roll out,” he added. 

Co-operation is a natural characteristic of the market so these partnerships make a lot sense. 

But banks will have to tread carefully if they decide to partner up. Opening up your client list to other financial institutions, however different their model may be, delivers immediate rewards, but also carries long-term risks to business, particularly if you want to continue your relationship to those clients as a lender in your own right.