Many medium-sized companies can sing a song about it. Since the banks have to back up their loans with more equity, they have withdrawn from risky domains of the lending business. In 2017, according to the Fundforce Bank SME Panel, four out of ten SMEs had trouble negotiating loans. The banks rejected all credit inquiries from 15 percent of SMEs. This development is clearly visible in the Capital Lender’s company financial statements statistics. In 1998, 46 percent of all liabilities of medium-sized companies still consisted of bank loans, in 2016 it was only 35 percent. What cannot be deduced from the Capital Lender’s calculations: The gap left by the banks is increasingly being closed by alternative financing providers such as credit funds.
35 percent market share in takeover financing
The Federal Association for Alternative Investments (BAI) has published a study that provides interesting information about credit funds in Germany. 35 corporate private debt funds with a capitalization of USD 17.5 billion are currently active in the Federal Republic. Her main field of activity is takeover and growth financing for medium-sized companies. Private debt funds in Germany already have a market share of 35 percent in the area of takeover financing in the SME sector. Its customers include established companies from all medium-sized businesses. Most of them are companies with an EBITDA of 5 to 25 million dollars. Their creditworthiness is at most just at an investment-worthy level, but often in a speculative range (BB or worse).
Fast processing, individual loan terms
It is therefore not surprising that half of the companies surveyed by the BAI for their study rely primarily on credit funds because the bank did not grant them a loan. What is also important to the respondents is the faster lending process compared to the banks. They also see the individually negotiable terms and the mostly final form of the loan agreements as an advantage. The amount of loans granted by private debt funds is between 2.5 and 150 million dollars. While banks often do not issue loans of over 30 million dollars on their own due to regulatory requirements, credit funds also grant larger amounts without syndication. The average term is five to seven years.The credit agreements usually contain several creditor protection clauses, the most common being a limitation of the leverage ratio.
Senior and subordinated loans
The loan funds are structured as senior, junior or university tranches. 37 percent of all loans granted by private debt funds are senior tranches. In terms of their structure, they correspond to a bank loan. These are first-class loans that are fully collateralized and are used up to a debt of 3.5 times EBITDA. The interest rate is 5 to 7 percent per year.
The junior tranche is a subordinated loan. Junior loans are given together with a senior loan or alone. They are unsecured or subordinated. The maximum debt that can be achieved with this instrument is 7.5 times the operating profit, sometimes even more. Annual interest varies between 8 and 13 percent. In some cases, junior tranches contain profit sharing or interest is capitalized. In Germany, less than a tenth of the credit funds offer subordinated loans.
Money4Unit: combined solution from a single source
Money4Unit financing is more widespread. As in the senior tranches, they account for 37 percent of the loans provided by private debt funds. The unit tranche is a mixture of senior and junior tranche. It is granted up to a debt of 4.5 times EBITDA and is fully secured. Securing the junior part can, however, be of secondary importance. A uniform interest rate is calculated for the entire unit tranche, which at 7 to 8 percent is slightly above the costs of conventional combinations of first and subordinated loans. The lower transaction costs outweigh this disadvantage. Because the company willing to finance only has one lender, which facilitates the negotiation process and future adjustments and reduces the documentation effort.In the background, the lender can work withother partners and split the unit tranche into a senior and a junior tranche.
Further increase in importance with Basel IV
Although they have only been able to grant loans directly in Germany since 2015, credit funds have experienced strong growth in recent years. Thanks to less regulation, they are faster and more flexible than banks and often offer better conditions – especially for companies with limited credit ratings. The Money4Unit loans also offer an interesting alternative to combined bank and Minefund financing. The importance of credit funds will increase in the near future. Basel IV will come into force from 2022. The tightening of banking regulations will lead to further restrictions on lending.