The Rise and Rise of Non-bank Lenders

There has been a seminal shift in the leveraged and infrastructure lending markets over the last year.

Historically, the big UK clearing banks have provided the substantial majority of debt to the mid-market.

Not anymore.

A wider and more diverse universe of lenders exists today - including specialist debt funds and infrastructure debt vehicles - offering increasingly competitive and flexible structures.

These non-bank lenders have taken a significant share of medium and long term lending from banks. In long term infrastructure deals, the UK and continental European banks have almost completely retreated.

In 2013 the number of transactions completed using non-bank sources of senior debt has dramatically increased, principally driven by the following four factors - massive quantitative easing, regulatory pressure leading to reduced bank lending, the search for yield and the post-crisis rebalancing of portfolios to fixed income.


The senior lender universe is expanding

Rising percentage of non-bank lending in mid-market LBO deals

* Twelve months to the end of September. Multi-banked transactions with £1bn or less of debt

Source: DC Advisory MidMarketMonitor

The four drivers of non-bank lending

1Quantitative Easing

Easing by printing – Central bank assets $tn

Source: The Economist

In response to the global financial crisis, central banks in the developed world slashed their benchmark interest rates. By early 2009 interest rates in the US, Europe, UK and Japan were close to zero, approaching what economists call the “zero lower bound”. Despite this, growth remained elusive and central banks resorted to quantitative easing, buying trillions of dollars of financial assets.

Since 2008, the biggest six central banks have spent $7.5tn on quantitative easing programs (source: Bloomberg).

The Federal Reserve predicts that it will have injected c.$4tn into the economy over the last five years to the end of 2013, thereby supporting equities and bonds and providing a constant flow of liquidity. 'QE' from the BoE amounts to a further £375bn.

Despite market expectations of the end of QE, the Fed recently decided not to begin tapering its $85bn-a-month of asset purchases because the US economy is still not sufficiently robust.

Printing money on this scale has created a substantial demand for assets with yield, whilst ensuring interest rates remain at all-time lows.

2Bank Withdrawal

Banks have lost their hunger to lend as a result of relentless regulatory pressure and ever increasing demands for their capital to be strengthened. There is no clear end in sight for banks who must now navigate Basel III and other new regulatory challenges.

The reduction in banks’ risk-weighted assets is not over. Further deleveraging of banks’ balance sheets, and new capital raising, are still required to satisfy regulators. A recent statement from the Prudential Regulatory Authority (PRA) on capital adequacy targets identified an enormous aggregate capital shortfall of £27.1bn in five of the eight major UK banks (source: Bank of England, 20th June 2013).

Barclays subsequently announced a £5.8bn rights issue and a target to reduce total assets by £65-£80bn (source: Barclays 2013 Interim Results). Across Europe complying with Basel III rules will require banks to reduce assets by €3.2tn (source: RBS report August 2013).

Substantial reduction in risk-weighted assets 2008 - 2013


3Prolonged low interest rates and the search for yield

Base rates have flatlined since 2009

The Monetary Policy Committee has held UK interest rates at 0.5% for a record five year period, forcing investors holding cash, to look hard for yield. Whilst the yield curve has steepened in recent weeks the long term risk free rates remain very low by historical standards.

The search for yield


4The move to fixed income

At the same time, there has been a substantial shift in strategic asset allocation in the UK since 2007. Holdings of fixed income have increased by 16% since 2007. Equity holdings fell by 30% over the same period.

Balanced portfolio

Change in strategic asset allocation in the UK since 2007 with increasing Fixed Income holdings in the portfolio

Source: Mercer – European Asset Allocation Survey (UK)

The result – an evolution of debt structures

Debt structures are evolving in a way that offers borrowers greater flexibility and a wider choice of options. Much of the institutional debt now being provided to the leveraged mid-market takes the form of ‘unitranche’ loans.

Unitranche facilities are frequently combined with super senior revolving facilities provided by clearing banks as they return to their traditional role of providing working capital.

Borrowers have overcome their initial fears of institutional lenders as counterparties. The prevailing view now is that their behaviour will be no worse than the banks’ when difficulties are encountered.

The institutionalisation of the infrastructure debt market is evolving in a similar manner to the leveraged loan market.

DC Advisory case studies

DC Advisory’s UK MidMarketMonitor attests to these trends as does our own experience.

40% of the 18 deals completed so far in 2013 by DC Advisory London’s Debt Advisory Group include non-bank lending. By contrast, in 2012, non- bank lenders were not involved in any of the mid- market deals on which DC advised.

AIM Aviation

DC advised Towerbrook on its acquisition of AIM Aviation, the leading designer and manufacturer of aircraft interiors. DC approached a range of direct lenders to source the required liquidity and maintain competitive tension, arranging a total debt package of £85m including both USD and GBP to reflect AIM’s business mix. Non-bank lenders included ICG and Highbridge working alongside Lloyds bank.


DC advised 3i and management on the €875m refinancing of Scandlines, a major Danish-German passenger and freight ferry operator.

DC managed a focused refinancing process engaging across a number of detailed workstreams and achieving optimal positioning of the credit story. The deal was fully underwritten with a running yield LBO structure and was so successful that margins were flexed down by 25bps.

Ideal Stelrad

DC advised Bregal on acquisition facilities totalling £155m to purchase Ideal Stelrad in June 2013. Ideal Stelrad is a leading European manufacturer of boilers and radiators. The M&A process was tightly managed and the sponsor needed to make a certain funds offer within 4 weeks. DC worked with two competing lender clubs, ultimately structuring the deal with ICG and Babson as term lenders. A super senior facility was provided by HSBC.

What next?

Jonathan Trower
Managing Director, DC Advisory London

Non-bank lending direct to corporates...

“We think the rise of non-bank lending in the leveraged and infrastructure mid-markets is a seminal shift. Not only has the amount of money looking for a home increased, but also borrowers are gradually being weaned off an almost exclusive reliance on bank providers. This can only be good for the market. As competition increases so the pricing and flexibility of terms improve.

We have talked for many years about the possibility of an investment / cross-over grade private placement market developing in Europe. Maybe the next steps on the journey away from a bank led financing market will be for European managers to extend their offering from the leveraged into the corporate market reducing the reliance of FTSE 250 companies on US based private placement investors.”