Leverage financing: entering the void – Finance and banking
UK: Leverage financing: stepping into the void
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As funds continue to reallocate capital to direct lending strategies, the Director of Business Development, Sinead mcintosh provides an overview of the leveraged finance market and highlights the crucial role of independent lending service providers in streamlining fund lending portfolios. *
Continuing the legacy of the global financial crisis of 2007-2008, large commercial banks are staying away from lending to middle market and lower middle market companies. Their successors, collectively called “alternative lenders” and made up largely of private debt funds, continue to fill the void by providing the necessary capital to businesses seeking alternative sources of finance.
Institutional investors are increasingly engaging with these non-traditional debt options. They offer shorter-term, higher-yielding investments than public bond markets and have a low correlation with public market volatility.
However, market uncertainty regarding the implications of COVID-19 and subsequent government stimulus measures have seen direct loan transactions concluded in Europe in the first half of 2020 fall by 29% compared to the same period last year. This put a damper on an increasingly competitive private debt market, with companies instead able to raise funds in cheaper public debt markets.
But budget support is now withdrawing, commercial banks continue to pull back, becoming increasingly risk-averse and focusing on managing their existing portfolios. In addition, optimism around a COVID-19 vaccine is restoring confidence in the markets. Along with pent-up demand and the absence of deals, alternative lenders are seizing the opportunity to enter the leveraged markets for which banks have less appetite, competing to deploy capital.
Each crisis is an opportunity for reinvention, innovation and collective agility. And companies that move towards direct lending strategies with the right scale, capital and expertise will perform best. However, many mid-market funds looking to diversify into direct lending strategies lack the internal resources and expertise to manage and rapidly grow a large loan portfolio.
Direct lending is a fast paced market and the pressure to enter the market quickly and deliver can create operational risks for underfunded funds. But managing loan portfolios on inefficient systems can significantly hamper the effectiveness of a fund’s operations, carry significant operational risks, and limit scalability. Focusing on these non-core operational tasks also drains internal resources that could otherwise be used for income-generating activities.
Engaging with an experienced and responsive independent loan administrator can help eliminate the operational challenges and risks faced by middle market direct loan funds. This can translate into optimized operations and improved data and reporting quality.
Increase transaction flow and reduce risk
Ocorian provides an end-to-end lending agency and a complete administrative package for direct lending funds. By combining our team’s deep trading experience with cutting-edge private debt software, we act as a seamless extension of internal transaction teams. This enables efficient management and monitoring of loan portfolios and provides real-time data and dashboards for tailored financial, management and investment reports.
Our scalable and operationally robust solution can be used across all asset classes to instill efficiencies and allow you to focus on your core business.
Originally posted by Structured Credit Investor 12/07/20, December 2020
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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