Funding growth through alternative lenders
Rebecca Cuffe, a Director in Debt & Capital Advisory, explores the debt funding options available for growth strategies
- Structures & Deal Purpose
- Advantages of using alternative lenders
- Sponsor/Sponsor-less Companies
The lending landscape in Ireland has never before offered as much choice to borrowers looking to debt fund a growth strategy.
Banks no longer the only source of debt financing
The three pillar banks, AIB, Bank of Ireland and Ulster Bank continue to dominate the Irish banking sector. Banks are however no longer the only source of debt financing, as the Irish debt market is now complimented by a growing population of 'alternative lenders'.
Alternative lenders consist of a wide range of non‑bank institutions that are able to fund across the capital structure from senior debt though to minority equity.
Data from the 'Deloitte Alternative Lender Deal Tracker Autumn 2019' shows that unitranche is the dominant structure in European alternative lending deals with 49% of transactions. Subordinate structures represent only 21% of transactions.
Alternative and flexible capital allows companies to grow and make acquisitions
Alternative lenders can offer effective rates with little or no equity dilution, enabling businesses to make acquisitions, grow activities and consolidate the shareholder base. Many of our clients have used alternative lenders to fund their M&A activity. This is corroborated by data from the 'Deloitte Alternative Lender Deal Tracker Autumn 2019' which shows that the majority of alternative lending deals in Europe over the last 12 months were M&A related, with 66% of deals being used to fund a buyout.
Due to risk appetite and stringent regulation, commercial banks can be constrained (i.e. in terms of leverage, flexibility of terms, tenor, structure) and bringing in alternative and flexible capital allows companies to grow.
The key advantages of using alternative lenders to fund growth may include:
- Access to increased leverage;
- Access to structures with minimal amortisation. This allows a company to:
- Protect cashflow – particularly relevant
in the period directly post acquisition when cash may be constrained;
- Accumulate cashflow for further capex /
- Pursue a buy-and-build strategy.
- Protect cashflow – particularly relevant
- Structural flexibility (covenants, headroom, dividends etc.);
- Little, or more often no, equity dilution;
- Acceleration of the growth of the company and growth in shareholder value in a shorter time period;
Borrowers have enhanced range of options to choose from but must obtain commercial fit
- Increased speed of execution, short credit processes and access to decision makers;
- Access to debt across the capital structure via senior, second lien, unitranche, mezzanine and quasi equity.
However, some factors to consider when using alternative lenders are:
- they will target a higher yield for the increased flexibility provided;
- they are unable to provide clearing and ancillary facilities; and
- their relationship / interaction with borrowers through the cycle is yet to be proven.
For sponsored companies (those with Private Equity backing), the advantages of using alternative lenders are a reduction in equity contribution and access to more flexible structures.
However, we are also seeing more sponsor-less companies turning to alternative lenders to finance growth. Of 401 deals in the last 12 months included in the Deloitte Alternative Lender Deal Tracker, 76 deals did not involve a private equity sponsor. The debt provided in sponsor‑less transactions tends to be more of a stretched A/B structure as opposed to pure unitranche. For these private companies, alternative lenders enable growth with less / no cash equity or dilution. As borrowers become more familiar with alternative lending solutions, many business owners are using alternative lending funds to fund their growth plans before planning their ultimate exit.
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 alternative lenders, working together on deals providing a piece of the debt or ancillary working capital, invoice discounting or leasing facilities. When structuring a deal with both an alternative lender and a bank one of the key negotiation points is the intercreditor agreement, however, agreed forms of intercreditor agreements are becoming more common.
With this increasing choice of funders, borrowers have a vastly enhanced range of options to choose from, in order to obtain a structure and commercial terms which best fit the needs and objectives of management and shareholders. The Deloitte Debt & Capital advisory team, drawing on debt market insight gained from raising over c.€1.8bn of debt in 2018 (including c.€500m secured from alternative lenders), can help borrowers navigate these options and ultimately secure the optimal financing package.