Victoria Young canvasses veteran lawyers on the outlook for bespoke financing in 2016.
It’s been flavour of the month for a lot of months now, but among leveraged finance advisers the conviction remains that 2016 will be another breakthrough year for alternative credit funds. Partners speaking to Legal Business say market conditions are ripe for such lenders, even as turbulence affects some larger sources of capital.
Such predictions are understandable as direct lenders built momentum through 2015 even in an environment that was generally a little more favourable to mainstream banks. Deloitte’s most recent alternative deal tracker, which surveyed 38 alternative lenders’ mid-market deals across Europe, shows a 14% year-on-year increase in deal flow in the third quarter of 2015, with 61 tracked deals in the three-month period. The accounting giant predicts direct lenders such as BlueBay and Ares will push further into the upper mid-market in 2016 after ten of the leading direct lenders raised a record €13bn over the first three quarters of 2015.
Indeed, with cracks appearing in the high-yield bond market in the fourth quarter of 2015 as market turbulence scares off fixed-income investors hunting higher returns, advisers expect the relatively shielded direct lending sector to profit as a more stable alternative.
Ropes & Gray London senior partner Maurice Allen (pictured) tells Legal Business alternative loan providers will see a better pipeline moving into 2016, adding ‘there is quite a bit of firepower and there will be bigger deals than previously’.
Reed Smith head of structured finance Tamara Box has a similar take: ‘We are seeing a growing number of credit institutions providing senior debt in the commercial loan space as well as replacing banks, and we are seeing that across the board.’
One such transaction Reed Smith completed in November last year was French luggage group Delsey’s €100m debt refinancing, which involved three specialist credit funds: Avenue Capital, Pemberton Asset Management and the credit team of buyout leader Permira. The transaction involved unitranche debt – the favoured tool for direct lenders – with inter-creditor arrangements covering several jurisdictions.
Maurice Allen agrees it’s going to be a bumpy ride for debt professionals, arguing it is ‘inevitable there is a crunch point in the high-yield market’.
Such trends underpin the continued evolution of Europe’s credit markets towards a more varied ecosystem less dominated by banks. While the regulatory onslaught against banks has probably passed its peak, upcoming capital requirements and ring-fencing reforms will continue to make regulated lenders look like lumbering dinosaurs against the quicker-moving funds prowling the undergrowth.
Box adds: ‘Every deal is bespoke. Some will have bonds and loans, and it may depend on tax and the position of the lenders in what they want and need. It is quite negotiated, in a way that senior bank lending may not be. Investors are crafting the product they want and borrowers are going to investors that give them what they want; it is a bespoke market.’
Kirkland & Ellis partner Michael Steele predicts unitranche products and direct lenders will become increasingly mainstream in Europe, echoing the more funds-driven credit environment long established in the US. ‘These special funds have the money for new deals and are disintermediating the banks. It looks to be growing as it is big in the US, and we tend to track that market. There is a different matrix around shadow banking and the regulatory outlook will be a growing topic that people are talking or thinking about, but I’d be surprised if there was action unless it was so massive it was systemic failure-type risk.’
Conversely, it will likely be another choppy 2016 for junk bonds in Europe as global stock markets buck amid a plunging oil price, a slowing China and sluggish growth in Western economies. Oh yes, and the small matter of the possibility of the UK voting to leave the EU this year.
Box predicts a ‘new normal of volatility’ as the market digests lower commodity prices. ‘There has been an active high-yield market, a lot of our clients are expecting it to peak, and fall over in some places. I have predicted volatility there for some time and somehow it keeps on going.’
Allen agrees it’s going to be a bumpy ride for debt professionals, arguing it is ‘inevitable there is a crunch point in the high-yield market’.
Steele concludes: ‘It will be another varied year subject to shocks and shifts, but leveraged finance markets all remain strong, interest rate activity will be the thing which everyone is watching, there may be some distressed assets as well. Non-bank lending will be a big source of work for lawyers and firms.’
victoria.young@legalease.co.uk