Record unitranche deal sign of debt fund robustness

GSO’s underwriting of a €600m debt product is a positive sign that the market is increasingly confident in financing such large tickets.

The €600 million unitranche financing underwritten solely by fund manager GSO is “the largest to date in the European market”, the firm’s chief financial officer confirmed in a second-quarter earnings call last week. Finalised in May, the debt commitment assisted in the merger between chemical companies Polynt of Italy and Reichhold of the US.

Pending regulatory approval, the merger will create a company that generates combined revenue of $2.4 billion per annum, making it one of the largest composite resins and coating companies.

The transaction is a sign of growing confidence in the European private debt market for alternative lenders to underwrite such deals – transaction sizes that were once the preserve of banks.

The Polynt/Reichhold unitranche deal comfortably surpasses the previous European record of Chiltern’s acquisition of clinical research company Theorem, where €400 million in financing was supplied by a club of debt funds including Hayfin, ICG, HPS Investment Partners and Bain Capital, which completed in September 2015. Before that, GSO held the record after underwriting the €350 million loan to CRH in December 2014, according to Deloitte’s Alternative Lending Tracker report.

Annette Kurdian, partner at law firm Linklaters, said the latest record unitranche deal is a sign of growing confidence in the market. “Funds are raising bigger funds and ticket sizes for deals are increasing, historically from around the €30 million to €100 million to funds able to do far larger sizes on their own. The sizes are also going up as more direct lenders club together. Bank loans of that size often need to be syndicated and therefore expose borrowers to capital market risk especially where underwriters require market flex terms or otherwise require banks to club together, which on a deal this size can be relatively time consuming.”

“We are seeing more of these big ticket deals, which makes sense when the larger players in the market underwrite either alone or jointly and then sell down chunks of the debt to other direct lenders to reduce, to a certain degree, the presence of the deal on their balance sheet,” Alex Griffith, partner at law firm Proskauer, said.

Jacco Brouwer, head of debt advisory at AlixPartners, agreed that there is a growing appetite for the unitranche product from both borrowers and lenders. “Unitranche was principally a product for the mid-market, but it is now beginning to encroach into syndicated loan/high yield territory. The market has evolved and more debt funds are able to underwrite large loans.”

In March, AlixPartners published a report that noted 111 unitranche deals were completed by both banks and non-banks in 2015, an increase of more than 60 percent in absolute terms compared with the previous year. Volatile macroeconomic issues at the beginning of the year have already punctured the likelihood of that figure rising again and given the uncertainty in the run up to, and immediately after, the recent UK EU referendum means that it is highly likely to be down in 2016, said Brouwer.

Despite the thirst for bigger, more prestigious deals, there is no slowdown in the big European debt funds pursuing opportunities in the mid-market range. A number of these firms grew up building relationships with the smaller companies and there is always the possibility that they will grow to a size where nine-figure debt commitments are required. There is a greater need for differentiation as the market increasingly becomes crowded, said Brouwer, and such large tickets enables them to stand out.

On the question of the uncertainty of Brexit denting opportunities, Kurdian said there is a healthy pipeline of deals for funds to pursue and their flexibility in financing complex situations should give them the advantage over banks. “I expect direct lending funds will strengthen their position,” she said.