Joint tenants in the French debt market

The origins of the French private debt market may well have developed during the retreat of the banks following the global financial crisis, but there is now much more co-operation between the two sides.

“We’re not working for the eviction of the banks,” says Geoffroi de Saint Chamas, partner at Pemberton Asset Management based in the firm’s Paris office.

“Our approach to private debt is often based on a collaborative relationship with banks, rather than competing systematically against them. Below €150 million of required financing, there is clearly less liquidity in the market, and banks are often keen to work with reliable and trusted partners to help them finance strong assets.”

Some private debt managers, however, may feel the banking disintermediation process has been too slow. An amendment to the French insurance code, made in 2012, enabled alternative lenders, insurance companies and pension funds to start providing private placements to French corporates. For many, this had raised expectations that opportunities would significantly increase.

It’s also important to acknowledge funds and banks chase very different types of transactions. For a senior debt product offering a 3 percent coupon and limited leverage, traditional banks are the place to go. For acquisitions, however, the unitranche instrument is perhaps the better fit.

“Because there is limited growth in Europe, companies under LBOs wishing to increase their EBITDA are willing to make significant build-ups,” Olivier Vermeulen, partner at Paul Hastings, tells PDI. “Active lenders, such as private debt funds, like to finance growth companies and are able to move rapidly to provide a unitranche package that includes a large capex/acquisition financing line (sometimes as large as the main acquisition facility).”

The flexibility offered from a unitranche package means borrowers initially reticent about using the instrument are more open to using it in opportunistic situations. This has come at the expense of mezzanine structures – a market suffering consequently. “The mezzanine market has significantly reduced and more or less disappeared in the mid-to-large cap area,” says Vermeulen.

Where many French borrowers may have been more sceptical in the past, attitudes are changing as clients become more familiar with the presence of alternative financiers, especially as banks continue to shut the door.

“In general, there is still a strong appetite from banks in the market to lend money to mid-cap borrowers,” says de Saint Chamas. “However, you see a number of assets that struggle to get proper financing through the banks – because of their business model, sector, past performance, aggressive development strategy, very stretched timing – which may find debt through the funds route.

“And those assets that have been financed by debt funds at a certain point in time may well come back to the banks once they become more legible and easier to swallow.”

In a peculiar twist, companies previously sourcing financing from debt funds are turning to banks to take advantage of refinancing opportunities. Both are a source of opportunities for each other as the alternative lending market continues to evolve in France.