‘Gorilla deals’ shake up the alternative lending market

• ‘Gorilla deals’ are transactions >€1 billion designed to draw attention in the market.
• Overall, non-bank deals up nearly 10% in Europe for 2018.

A type of private debt loan is breaking through the €1 billion barrier this year, according to Deloitte’s Alternative Lender Deal Tracker. The research shows that the value of private debt ‘unitranche’ deals, or direct loans blended into different types of debt into a single instrument, tipped over €1bn in January and more such ‘gorilla deals’ are expected this year.

This comes against a backdrop of a 9% increase in alternative lending deals in 2018 compared to the previous year (12 months to the end of 2018).

In January, Ares Management completed a £1bn (€1.17bn) refinancing for the software services business Daisy Group - the largest debt fund deal executed not just in Europe, but globally. Recently, an even bigger €1.5bn deal by Blackstone’s GSO to finance the leveraged buyout of German-listed Advent International failed to come to fruition.

Chris Skinner, head of the debt advisory team at Deloitte, commented: “It is significant that both of these deals were in Europe as it points to a shift in the dynamic of the trans-Atlantic leveraged loan market. Traditionally, the US has led the way while Europe has followed.

“Leveraged finance in particular has received a lot of attention of late. Following the release of minutes from various committee meetings held by the Federal Reserve, Bank of England and the International Monetary Fund, some commentary has drawn parallels to the growth of sub-prime mortgages in 2006. 

“Looking back, the annualised default rate for leveraged loans was 3.5% between 2007-2012, with a 70% average recovery on defaulted loans. Those numbers don’t feel as if they could trigger an upset in the markets. However, recoveries are likely to be lower in this cycle due to loans making up more of the capitalisation, and creditors' rights impaired by lack of covenants.”

The amount of outstanding leveraged loans tracked by Standard & Poor (S&P) in the US & Europe has doubled from its peak of roughly US $570bn before the financial crisis, to almost US $1.2tn now.

Floris Hovingh, head of alternative capital solutions at Deloitte, added: “It has been argued that rather than increasing systemic risk, direct lending funds participating in the leveraged loan market can provide a countercyclical defence against market extremes. Direct lending debt funds receive commitments of up to 10 years from their limited partners unlike banks which are forced to meet withdrawals by depositors at short notice. As a result, private direct lending funds can better weather a financial crisis, posing less of a risk to the global financial system.”

Deloitte’s research also found that the debt funds are continuing to stock up their firepower. In July 2018, Ares collected €6.5bn for its fourth European Direct Lending fund, exceeding its initial target of €4.5bn by approximately 45%. In addition, the fund is expected to borrow approximately €3.5bn in debt, giving it approximately €10bn.

Floris Hovingh concluded: “Other examples of managers keen to get in on the action include BlueBay, currently in market with a €6bn raise. With funds still holding so much dry powder it seems logical that more €1bn deals are likely in the near future.”

End

Note to editors

About the research
Deloitte’s Alternative Lender Deal Tracker covers 67 major alternative lenders across Europe, covering the period up until the end of 2018.

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