Q1 2021
Direct lending news in brief
Selected stories from Creditflux and Debtwire
Creditflux and Debtwire report on the biggest stories in the world of direct lending. Breaking exclusives on funds, launches, strategies and hires make these must-have services for a market hungry for news. The stories here are just a small sample of what is on offer
Tikehau launches ESG private debt fund
Tikehau Capital has held a first close on an inaugural impact private debt fund, Tikehau Impact Lending, at around €100 million. Among investors in the fund is anchor investor European Investment Fund, the firm said in an announcement. Creditflux reported in September 2020 on Tikehau’s plans to launch the fund, which has a €350 million-€400 million target. Tikehau says the fund will provide more favourable financing conditions, such as lower interest rates, to companies that meet their sustainability goals.
ESG-linked pricing ratchets are a growing trend in the European leveraged loan space, having previously been confined to the investment grade market. Typically, if a borrower satisfies certain predetermined sustainability targets (either an overall ESG score or more specific key performance indicators), the margin on the loan is adjusted. But the concept of ESG ratchets is more muted in the private debt area.
Tikehau says the fund will invest in European small and medium-sized companies that ‘contribute to the sustainable economic transition’ in Europe — either by their offering, their resource management, or their processes.
Specifically, the Paris-headquartered firm says the target will help positively contribute to at least two out of five of the United Nation’s Sustainable Development Goals.
The COVID-19 crisis has bolstered the trend towards ESG investing — Bfinance’s latest ESG survey revealed that more than 90% of investors say ESG criteria are important when selecting external asset managers.
Bain preps follow-up to 2015 global direct lending fund
Bain Capital has launched its latest direct lending strategy, Bain Capital Global Direct Lending 2021, according to US regulatory filings.
The Boston-headquartered manager raised its last senior loan direct lending strategy in 2015, according to Debtwire Funds Data. The vehicle held a US$485 million final close in May 2015, comprising a US$100 million unlevered sleeve and a US$385 million levered sleeve.
Bain Capital Middle Market Credit 2018 held a US$973.4 million first close in 2019, according to the database. That fund is mezzanine focused and invests in companies with EBITDA ranging from US$10 million to US$150 million.
Groupe La Centrale buyout backed by €205m unitranche
Macquarie, Bridgepoint Credit and Bank of Ireland provided a debt package of €205 million to support Providence’s majority stake carve-out of Groupe La Centrale, a French vehicle testing and certification services provider.
The debt package comprises a €190 million unitranche, provided by all three lenders, in addition to a €15 million RCF provided by BOI. Macquarie is the main contributor to the unitranche, while BOI provided €15 million towards this facility.
The financing was structured off EBITDA of around €32 million, implying a leverage of just under 6x.
M&G pledges £5 billion to ‘sustainable private assets’
M&G has announced that it is allocating £5 billion from its £136 billion with-profits fund into businesses using a model that emphasises ESG, sustainability and impact investing. It will target ‘innovative responsible enterprises which are currently underserved by providers of institutional finance’. To accomplish this, it has created an investment team dubbed Catalyst, which will invest in private credit, real and financial assets and private equity.
According to John Foley, chief executive of M&G: “More and more customers are asking us to make a positive difference to the world through sustainable investment, while also seeking good financial returns to underpin their retirement. Many of the most attractive opportunities to do this are in private assets — new and existing companies and platforms which are not listed on an exchange. As a cornerstone investor in such enterprises, M&G can have a much greater influence in supporting their growth and on sustainability than we can in public markets.”
The global Catalyst team will use the investment classification framework put forth by the Impact Management Project, which is designed to build a consensus on measuring and reporting on sustainability and ESG investments.
M&G says this framework involves looking at investments across three categories: ESG (backing ventures that act to avoid harm), sustainability (investments that have a positive effect on people and the planet) and impact (contributing solutions to societal and environmental challenges).
M&G will use the same negative screening process it does for its ESG funds. Its positive screening will be conducted using its proprietary ‘ESG scorecards’.
Borrower’s market allows US terms to swim to European shores
Over a year after COVID-19 was declared a pandemic, the slippery nature of loan documentation has only intensified. Now, sponsors are increasingly pushing terms more commonly used in the US for European deals in the direct lending space. Fierce competition for COVID-19-proof assets is enabling borrowers to test how far lenders are willing to go when it comes to document flexibility.
“The market continues to move towards sponsors and the post-pandemic world is helping that — the competitive dynamic of fewer deals in the market is helping to drive terms closer to sponsors,” says Stuart Brinkworth, partner at Mayer Brown.
With leverage largely staying flat, competition is turning to pricing and documentation. Sponsors active in the US market, which is well known for having more lofty documentation than Europe, have been capitalising on the market dynamics to push for the flexibility they are used to on the other side of the Atlantic.
“Aligning docs with the US is a big trend. It only takes one to make it a precedent,” adds Brinkworth. A few of the US terms coming to Europe’s shores include the disappearance of mandatory pre-payment of debt, for example when there’s a disposal, as well as quarterly instead of a monthly reporting schedule, although lenders are pushing back on this.
Pricing ratchets pose challenge for ESG unitranches
The question of how to incorporate ESG into direct lending has loomed large for years as social impacts have grown in prominence in the world of leveraged finance. But the notoriously opaque mid-market — which is not held to the same degree of public scrutiny as its liquid counterparts — has been more hesitant about taking the plunge. Now, however, things are starting to change.
Over the last six months, debt packages featuring ESG-linked margin ratchets were included in the financing for UTAC CERAM, Questel and Moustache Bikes. A handful of other mid-market pan-European debt funds have also been quietly working on their own ESG-linked transactions, according to seven market sources.
Behind the headlines, a deeper conversation is being had on how to balance the need for high returns with the increased requests for socially conscious lending from LPs.
“It’ll only increase in prominence in the market,” says a lawyer. “It’ll be investor driven, and investors will continue to care a lot more about it. Interesting funds want to offer incentives which will reduce margins that are already squeezed.”
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European Direct Lending Perspectives
Q1 2021
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