Q2 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
Managers offer solutions for underfunded pensions
Credit managers are tapping UK defined benefit pensions that are battling negative cashflows. Recent examples include BlackRock, which held a US$940 million first close on its Diversified Private Debt Fund, and Tikehau Capital and DWS’s strategy, dubbed DWS Secured Income Fund.
Simon Males, who leads Tikehau’s UK institutional business, says two-thirds of the UK’s 5,200 corporate defined benefit pensions are cash-flow negative, meaning contributions made are less than payments going out. “That cash-flow negativity is marked in terms of the percentage, but the trend is also going one way,” he says. It is estimated that 90% of pensions will be facing this issue by the end of the decade. As a result, pension funds are seeking stable, secure income streams.
DWS Secured Income Fund will invest across direct lending (70%), infra debt, real estate debt, CLOs and ABS, with cash flows that align with those of pensions to help bridge the funding gap over the next five to 10 years, according to Shalin Bhagwan, head of pensions advisory at DWS. The DWS/Tikehau fund has a £750 million hard cap. It will target a roughly 5% net IRR. Around 60% of income will be returned within five years, and all cash returned in eight, says Bhagwan.
The strategy differs from regular private credit funds in that it will take 100% of cash from investors on day one. “Private credit managers often have capital call processes that occur at short notice and could happen five or six times in a two-year period,” says Bhagwan. To facilitate deployment, the fund will invest in tradeable credit to begin with and transition to private credit over two years.
Prytania and SCIO partner with UK SME Capital
SME Capital has formed a funding partnership with London-based fund managers Prytania Asset Management and SCIO Capital. The arrangement will direct capital towards “owner-managed and local businesses” in the UK.
SME’s partners have backgrounds in structured credit. SCIO has reinvented itself as a direct lender, having been established in 2009 as a structured credit firm, and Prytania remains a large, structured credit investor across CLOs, RMBS, CMBS and ABS. SME Capital extends loans to business starting at 8% fixed, according to its website, with an average loan size of £2 million.
Evli launches global private debt fund of funds
Evli Fund Management has held a €59 million first close on its global private debt fund of funds, according to an announcement. The close was held on Friday 14 May.
Evli Private Debt Fund I will invest in North American and European private debt funds. The €1.2 billion manager says the launch was in response to the heightened demand for private debt with the declining role of banks and increased demand for private financing.
Evli’s new fund will be available for professional investors and a “limited number of non-professional clients who wish to diversify their investment portfolio outside of the traditional asset classes”. The fund’s minimum investment is €100,000.
The fund will also adhere to Evli’s ESG criteria and, as such, Evli Private Debt Fund will not invest in funds that do not have their own ESG policy or do not consider ESG criteria in their investment process, the firm said.
Unitranche leverage and pricing in disarray as borrower’s market heats up
Ever-increasing competition in the direct lending market is testing financiers’ psychological threshold of keeping pricing at or above leverage, with debt leverage shooting up while pricing is falling. Many deals this year have seen debt creep over 6x while pricing remains below that level, hitting the five-handle on the most competitive deals.
“I keep thinking we’re at the top of the market, and then there’s another deal where the price has dropped or the leverage has gone up, and you think okay that’s another step, there’s more to come,” said a lawyer.
The drop in pricing could lead to an uptick in refinancings, as top credits seek to take advantage of the new normal. This could especially impact deals that were done within the past year, non-call and other early refinancing protections permitting. “There’s a bunch of deals that were done last year that — with the movements in pricing — are looking ripe for plucking off the roster and refinancing,” the lawyer added.
With lenders bending on pricing, sponsors have also been pushing adjustments to EBITDA and future cost synergies. Large-cap terms have been trickling into the mid-market for some time, but the increased competition seems to have opened more doors for these asks than ever before. Pricing and conditions in the syndicated market have also become looser, filtering down into private credit as well.
Astek refinances unitranche with package from HIG Whitehorse
Astek, a French IT consulting services and technical engineering specialist, has picked HIG Whitehorse to refinance its existing unitranche, provided by Tikehau.
The new debt package amounts to approximately €170 million. The financing comprises a unitranche of around €130 million and an acquisition facility of €40 million. The drawn debt was structured off €30 million EBITDA, which implies a roughly 4.3x leverage.
Banks were also keen on the refinancing. Some were planning to arrange a debt package featuring a senior facility plus a PIK. Tikehau provided a €95 million unitranche to the business in 2018 to support external acquisitions.
Multi-asset funds move to take debt chunks in PE deals
Large-cap sponsors have rarely financed a minority share of their PE buyouts through their direct lending division. But as direct lending evolves — with competition fuelling change — the market is starting to morph into one where a fund’s private credit is being increasingly used to support its own PE arm’s buyout of the target.
“What’s happened recently is that large-cap PE firms invest more into smaller deals, while direct lenders are financing larger deals; naturally there’s an overlap. You can call it a shift in strategy but really it’s just natural, with deals overlapping combined with increased competition,” said a direct lender.
PE heavyweights, including Bridgepoint, Blackstone, Permira, CVC and KKR, among others, have the option of carving out a minority share in their buyouts’ debt for their credit arms under their multi-asset investment model, the first and three additional direct lenders said.
Fierce competition in private credit, particularly for top-quality assets, also means using that optionality to its maximum ability. “What’s changed now is the percentage that lending arms are coming in — it used to be 5%-10%, now it’s closer to 50%. Also, it’s more systematic and on larger tickets,” the same direct lender said.
While the move of extracting synergies from having the option to provide minority financing seems to be gaining ground, it is still far from being lenders’ bread and butter. Most financiers in private credit aim to be the sole lender and therefore having the control over the business, whichever way the road ahead leads.
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European Direct Lending Perspectives
Q2 2021
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