EXTENDED INTERVIEW: Banks lending to B-rated credits is not sustainable

Germany is one of the most over banked markets in Europe, which has made it difficult for private debt funds to penetrate. Private Debt Investor talks to Pemberton Asset Management’s Jürgen Breuer about why it is not sustainable. See below for full transcript.

Transcript

If you take a closer look at the market today, it’s quite striking. You look at your average buyout, financing, Let’s say the banks go at it and structure it in the way they’ve always structured it as a bank club, putting together three, four, five, six, seven lenders, each of them contributing €20-30 million per bank.

And maybe for a decent company leveraging up 4-4.5 times, and they price it right now at somewhere between 325 to 350 basis points, maybe 375 over Euribor.

On the other hand you have private debt funds look at the same companies very often, we may come up with maybe half a turn more leverage, or three quarters of a turn and we price deals at – and we’re talking about senior here – we’re pricing deals at maybe somewhere between 600, 650, 675, up to 700.

I’m entirely convinced that banks lending to single B-rated credits at 325 or 350 is not sustainable, it is simply not sustainable.

Why? Because in all the years I was doing this for banks, when we took a leveraged loan to credit committee the only question, the only debate in the committee was, is it a good credit and do we want to lend to it?

There was never a question whether the pricing we were putting on it was actually sufficient to cover cost of capital.

I think the ultimate way for partnering will be, in a realisation that the capability for the bank to provide the full requirements of a corporate are limited.

It makes a lot of sense for a bank in such a situation to turn to a private debt fund rather than a friendly bank round the corner to make up for the remainder.

Clearly it’s very important for the banks to get the additional revenue from other parts of the relationship with the corporate, payments business, FX, whatever it may be, to make the overall lending relationship more profitable for them.

Clearly if you bring in other banks to the transaction you also bring in more competition for that wallet of revenue, whereas if you bring in a private debt fund you don’t, because the private debt fund is interested in lending to the business, and is not interested in other parts of the revenue from the corporate relationship. So that’s actually a fairly natural sort of symbiotic relationship.