Alternative Lending in action
Spotlight on the Irish market
John Doddy, a Partner in Debt & Capital Advisory Ireland, shares his views on developments and opportunities in the Irish market.
Historically dominated by local banks, the Irish lending market has experienced a period of unprecedented change since 2008. What has emerged is a smaller traditional banking sector containing fewer active players with a reduced appetite for risk. This development has resulted in a funding gap, most notably in the Irish property and SME sectors.
As with other countries in Europe, Government institutions have actively encouraged Direct Lenders to set up in Ireland, thereby helping to address the funding gap. The Ireland Strategic Investment Fund (“ISIF”), which is managed and controlled by the National Treasury Management Agency, is an €8.0 billion sovereign development fund which has invested in a number of Direct Lending funds. These include Direct Lenders such as BlueBay Asset Management, WLR Cardinal Mezzanine Fund, Activate Capital, BMS Finance and Finance Ireland.
John Cantwell of ISIF comments “We are particularly interested in supporting players that provide products not widely available in the market, so we look to fill gaps, and that objective is evident in the products offered by the Lenders supported to date.”
The level of activity continues to grow year on year, as shown in the graph below. Indeed we are aware of 91 deals completed in the Irish market since 2011, provided by 18 different funders.
As demonstrated in the pie chart below, 34% of deals were in the property sector. The typical Irish direct lending fund size is c.€100m - €500m, with the typical deal size being c.€10m - €15m. Unitranche and mezzanine finance (predominantly for property transactions) are the most common forms of debt provided in the Irish market.
Initially the majority of deals involved special situation funds looking for opportunities in a dislocated property marker, particularly on the refinancing of non-performing loans from banks or loan acquirers who participated in bank deleveraging activities. This is to be expected given the level of non-performing loans traded in Ireland in recent years - some €23.3 billion of Irish loans were sold during 2015, €12.1 billion in 2016.
However Direct Lenders have also been active in trading businesses where there are significant levels of fixed asset backing, most predominantly the hospitality and healthcare sectors. Notable transactions include a €300m refinance of the Mater Private Hospital by Macquarie, one of the largest unitranche deals in Europe to date, and Broadhaven’s funding of the Trident Hotel and Actons Hotel.
More recently we are seeing increased direct lender activity in the property development sector. Whilst the banks are active in this sector, a significant number of transactions require a higher level of leverage than offered by banks. This therefore presents an opportunity for direct lenders in the market. Typically direct lenders in this sector provide unitranche facilities or mezzanine debt facilities to co-fund a development with senior lenders.
Paul Corry from WLR Cardinal Mezzanine Fund comments “We work closely with each of the senior lenders in the local market and can provide a flexible mezzanine layer of debt on top of the core debt which the senior lender can provide.”
With the improving Irish economy we are seeing increased levels of Private Equity sponsored deals, with both Irish and UK based direct lenders demonstrating a strong appetite to offer unitranche structures. For example, in February 2017, Sovereign Capital backed the management buy-out of Arachas Corporate Brokers; debt to support the transaction was provided by Five Arrows Direct Lending.
Martin Hook from Five Arrows Direct Lending comments "We were delighted to provide the unitranche financing to support the recent acquisition of Arachas. The current dynamism of the Irish economy, particularly in the SME segment which Arachas principally serves, provides a supportive backdrop to the company's continued growth.”
However, SME businesses in Ireland are predominantly family owned, private companies, and therefore a lot of corporate activity in Ireland is sponsorless. Whilst sponsorless deals are more challenging for direct lenders there is strong interest from both Irish and UK direct lenders to fund transactions > €10m. However the debt provided tends to be more of a stretched A/B structure as opposed to pure unitranche. As borrowers become more familiar with Direct Lending solutions, many business owners are using direct lending funds to fund their growth plans before planning their ultimate exit.
Pat Walsh, Director at DunPort Capital Management which advises BlueBay in respect of its Irish corporate credit vehicle comments “The BlueBay vehicle has provided facilities to its borrowers to enable them fund situations such as organic growth, acquisitions, shareholder based recapitalisations and re-financings. The quantum of debt provided, relative to more conventional sources can stretch to a higher level than those conventional sources are either willing or able to get to but on a satisfactory risk adjusted basis to the lender.”
It should be noted that the Irish banks remain competitive and have a strong appetite to fund corporate activity in the Irish market, indeed Irish banks have funded the majority of deals done to date by Irish based Private Equity sponsors. The banks are also starting to coexist with direct lenders, working together on deals and agreed forms of intercreditor agreements are becoming more common.
Andrew Graham, Director at Bank of Ireland Corporate Banking comments “The Irish financing landscape continues to evolve given the variety of capital currently available. Driven in part by a prevailing low interest rate environment and a strengthening domestic market dynamic, both of which are helping to drive buy-outs, sectoral consolidations, domestic and cross border M&A. We regularly work with domestic and International Alternative Lenders and Private Equity Sponsors. In cases where the capital requirement is beyond conventional bank debt parameters, the best solution often involves a collaborative approach through a combination of senior debt and equity or quasi equity finance – yielding clear cost advantages and longer term strategic benefits to borrowers."
Also in response to the increased number of alternative lending deals the banks are also becoming more innovative in order to compete - for example AIB has set up a mezzanine debt fund.
Ronan Burke, Head of AIB Mezzanine Finance Unit comments “AIB’s Mezzanine Finance product is a key part of the Bank’s debt offering, and together with our Senior debt product makes us a ‘one-stop’ shop solution for customers’ financing needs. In 2016 the Team lent in excess of €60m to seven businesses in Ireland and the UK.”
Our expectation is to see the trend of increasing numbers of direct lending deals continue as Ireland becomes a more attractive prospect for both direct lenders and Private Equity funds. Ireland’s economy grew 5.2% in 2016, outstripping all other euro zone countries and most official forecasts for the third successive year. The outlook for the Irish economy remains positive, the ERSI has stated that economic growth is set to remain solid in 2017 (GDP growth 3.8%, employment growth 3.1%).
Pat Walsh at DunPort Capital further comments “the opportunity for alternative lenders in Ireland will continue to grow and DunPort is seeking to raise a new independent €300m corporate credit vehicle to provide debt capital to profitable, established companies with a strong credit profile and a demonstrable ability to service and retire sensible debt levels”.