LONDON, Nov 6 (LPC) - Direct lenders are increasingly looking for opportunities in Spain, following private equity firms into the region as they look beyond a crowded Western European mid-market in search of new deals and yield, bankers said.
Ares Management, Bain Capital Credit, BlueBay, CVC Credit Partners and Pemberton are some of the most active direct lenders in Spain, stepping up their efforts significantly in 2019 to find opportunities as private equity firms including Advent, EQT, Portobello and investment firm Investindustrial seek investments in the region.
Although the Spanish market is still dominated by bank lending, with around 80% of deals involving traditional lenders, the number of transactions led by debt funds has increased steadily in the last three years, according to Deloitte’s latest Alternative Lenders Deal Tracker report.
“Spain has always felt like a market which has been less integrated into Europe and in terms of banking has always been more balkanized with strong regional champions trying to protect their turf. But with more international sponsors hunting around, direct lenders and international banks have followed suit,” a capital markets head said.
With eight private debt transactions registered in the first three quarters of this year, the market has already hit 2018’s total deal level, according to Investment bank GCA Altium’s third quarter MidCapMonitor report.
While Spain was a no-go area for investment in the wake of the financial crisis, its economy is now one of the fastest growing in Europe, steadily exceeding the euro zone’s average growth rate over the past few years. In the third quarter of 2019, its unemployment rate decreased to 13.9%, the lowest rate for 11 years.
Despite recent concerns over unrest in Spain’s wealthiest region of Catalonia and political uncertainty as Spain prepares for its fourth election in as many years, the strengthening economy has caught the attention of European private equity sponsors and consequently, international lenders.
Private debt funds have found increasing opportunities to partner with European private equity sponsors -- particularly those from the UK -- that are looking to back their portfolio companies’ growth strategies in Spain.
While local sponsors have had a preference to utilise their relationships with more conservative Spanish lenders, they are also catching on to the higher leverage on offer from direct lenders.
“There is a trend towards more term loan B and unitranche providers are more noticeable,” a senior banker said.
Unitranche facilities are attractive for borrowers as it means they can raise their leverage to a higher level to pursue their growth strategy.
Direct lenders are willing to offer leverage of 5.5-6.0 times in Spain, compared to the 2.5-3.0 times offered by the more conservative Spanish lenders.
“Generally, local sponsors have not tended to leverage up their portfolio companies. That raises interest from UK sponsors which act more aggressively with higher leverage and would look at alternative debt structures to finance expansion and growth strategies,” the senior banker said.
QUALITY IS KEY
Most private debt transactions in Spain involve borrowers that are backed by well-established private equity firms.
“People look at the quality of the borrower and the sponsor. If the sponsor is a household name, it will attract established direct lenders,” Norbert Schmitz, managing director at GCA Altium said.
Direct lender Pemberton, the asset manager backed by Legal & General, hit a milestone in Spain, completing over €600m of deals across four transactions in 2019, it announced in October. The deals included financing Advent International’s acquisition of dental clinics Grupo Vitaldent, and InvestIndustrial’s public tender offer for the delisting of chocolate product manufacturer Natra.
Prior to 2019, Pemberton completed its first deal in Spain in 2016 and completed another one in 2018.
In addition to deal flow, Spain is also attractive to direct lenders as financings can often come with a pricing premium compared to Western European deals.
On average, direct lenders can demand a 50bp-100bp premium on transactions in the Spanish market compared with the rest of Western Europe, according to a senior private debt fund manager.
Private debt funds are still cautious when lending to Spanish companies as local laws tip the balance towards borrowers and away from lenders and investors.
“We still feel that we need some form of pricing premium to invest there,” a senior private debt manager said.
Despite the pricing premium, it’s not enough to tempt all direct lenders to the region, on a risk-reward basis, the senior private debt manager said.
The economy has largely been immune to Spain’s political woes but its expansion has slowed of late.
Spain’s caretaker government earlier this month forecast gross domestic product would increase 2.1% this year, down from its previous forecast of 2.2%, and slow to 1.8% in 2020. Most opinion polls point to a stalemate after the November 10 election, with no clear majority in sight.