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 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:
However, some factors to consider when using alternative lenders are:
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.