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Spread of stretched senior funds risks cannibalising unitranche pricing

With banks fighting hard to keep hold of their turf, offering competitive leverage on deals, asset managers are increasingly looking to stretched senior financing as a way to compete in a level playing field. But with a rising number of players expected to offer the 5-6% stretched senior in 2017, the new debt solution risks doing to the unitranche what second lien did to mezzanine.

“The most likely net loser is the unitranche as the way people structure it is that they use senior as a base – it forces unitranches to put even more incremental risk on,” said a fund manager. “It won’t affect every deal. Will it erode the unitranche pricing in the traditional mid market space? Likely. But not on the larger end as there is not enough liquidity for stretched senior at that level.”

“We see the two as quite distinct products and there are situations where we wouldn’t quote stretched senior full stop - it’s unitranche yield – others we pick three points where we see bank, stretched senior and unitranche. It’s the flexibility it gives us as managers,” said another fund manager.

Most managers in the market now claim they can allocate a portion of their funds to 5-6% loan deals, although few have actually done it. The list of those with that capability includes Barings, Bluebay, Goldman Sachs Private Capital, ICG, Hayfin, Partners Group and Pemberton.

To add new tools to their tool box, managers use sole managed accounts on top of their comingled funds. While some have separate teams looking at the different financing options, others opt to run deals out of the same team to avoid having two competing products in their books.

At the end of the day, stretched senior or unitranche, is senior debt or a bit more senior debt. If funds struggle to differentiate on leverage, they must look at flexibility on terms to justify the high-6%-plus pricing on unitranches.

“Covenants and headroom is what differentiates them [unitranche], more than leverage. Will banks do 30% headroom? I don’t think so,” said a lawyer.

One potential side-effect of the spread of stretched senior is the increase in managers offering term loan Cs, bridging the gap between senior bank debt pricing and second lien.

“It might have a knock-on consequence of increase in TLB/TLC structures. In the past these were a bit difficult to put together, which might also eat into the unitranche pie. It offers, say, a 50bps premium to what the bank is pricing, it creates more firepower for the group of banks, and some sponsors really like it,” said the first fund manager.

Unitranche pricing is already coming down, with some managers willing go to a six-handle as opposed to the traditional seven-handle minimum margins, but they make up by getting involved in more complex deals.

“A lot of the funds have raised lots of different pots of cash now so they can look at different options. If you have sufficient size you can take a holistic approach – take a haircut on one, look at a more difficult one with 8% pricing on the other. If you’re a small fund that’s hard, but if you start getting to a decent size you can play around with it more,” said a debt advisor.

“Funds that are out fundraising senior stretch will have greater success as they’ll deploy capital quicker than others who are not there yet. First out the door is key to continued success,” said a second debt advisor.

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We hope you enjoyed the mid market chatter, to hear Mariana's views in person, she will be moderating interactive panel debates at Debtwire's European Mid Market Forum in london on the 24th May 2017.  Visit the event website for more information.  

Mariana Valle Co-Deputy Editor Debtwire

Mariana Valle is co-deputy editor at Debtwire Europe, running the primary and leveraged loans coverage of primarily private equity deals across mid-market and large cap. Mariana and her team break news across the European leveraged/high yield debt space, uncovering upcoming LBOs/debt issuers, underperforming credits and trade ideas, also producing analytical articles on company earnings, new issuance and market trends. Mariana has over nine years of experience covering corporate finance and private equity, seven of those with Debtwire. She has a first class BA (Honours) degree in journalism from the University of the Arts London.


Mariana Valle Co-Deputy Editor Debtwire

Mariana Valle is co-deputy editor at Debtwire Europe, running the primary and leveraged loans coverage of primarily private equity deals across mid-market and large cap. Mariana and her team break news across the European leveraged/high yield debt space, uncovering upcoming LBOs/debt issuers, underperforming credits and trade ideas, also producing analytical articles on company earnings, new issuance and market trends. Mariana has over nine years of experience covering corporate finance and private equity, seven of those with Debtwire. She has a first class BA (Honours) degree in journalism from the University of the Arts London.


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