Prior to the financial crisis, European corporates and financial sponsors were able to take advantage of easy access to bank loan finance, often at attractive rates as banks fought competitively for new business. There was rarely a need to look at alternative sources of debt capital.
The financial crisis has triggered a structural change in debt financing in Europe. Banks are under ever tougher scrutiny and regulation, meaning more capital needs to be set aside to cover lending positions.
Coupled with their own resources being cut back and higher funding costs, this means bank debt capital is harder to obtain than ever before, and more expensive. As a result, companies and financial sponsors (private equity) are increasingly relying on the bond markets or the non-bank loan market either to refinance existing bank debt or raise new facilities.
Range of options
The fact that banks seem to be paying as much, if not higher rates, for their funding than many of their customers has created a market of new options.
The search for returns by income-hungry investors has led to an influx of capital into bond markets and non-bank loan funds, as illustrated in the chart below. These investors are actively looking to put their capital to work.
Therefore, bond markets are booming and offer a very liquid and flexible source of finance in certain situations. In the liquid leveraged capital markets, borrowing costs (‘coupons’ or ‘spreads’) are at all time lows and volumes of new issuance are at an all time high. More companies and sponsors are therefore taking their first steps in these markets and Catalyst expects to see this trend continue.
However, bond markets, by virtue of constraints on size and credit quality, cannot cater for all players and other established forms of non-bank and alternative bank lending remain the only source of finance for such borrowers.
The good news is the strength of liquidity and appetite to lend which is prevalent in the bond markets is now also being seen in these private loan markets. New specialist funds are competing directly to replace bank debt as a core medium to long-term lending option for the mid-market.
Bank capital will clearly always have a place in the financing tool kit. However, for the first time in Europe, mid-market companies and financial sponsors have the same number of financing options as their larger peers have had for years.