A recent report on alternative lenders1 reveals a peculiar gap in the funding available to private businesses.

Traditional senior debt (priced from 200-450bps) and unitranche funding (600-800bps) are both well-served. However, there’s a marked absence of what’s known as stretched senior debt, priced between 450-600bps and designed to offer a blend of flexibility and structure without maximising leverage.

That makes things awkward for borrowers seeking funding at this level: they’re forced to choose between two awkward fits, either squeezing uncomfortably into traditional senior debt facilities or over-leveraging with more expensive unitranche funding.

So why the gap?

On the supply side, there is only a limited number of providers out there who are willing and able to provide funding at this pricing (Investec being one of them).

That’s because it sits in a difficult space: returning less than the usual target hurdle rate for private debt, and just out of reach for traditional banks’ risk appetite.

But we believe supply dynamics is the wrong reason for a company to structure their borrowing a certain way.

There are many good reasons to want to avoid heady leverage: primary buyouts with management teams new to leveraged borrowing, minority investments or even regulated operating entities all come to mind. Perhaps an amortising strip or a more revolving acquisition facility would suit best, both of which fit the stretched senior pricing range well.

Helen Lucas
Helen Lucas

There are many good reasons to want to avoid heady leverage: primary buyouts with management teams new to leveraged borrowing, minority investments or even regulated operating entities all come to mind.

 

Who can it help?

We are seeing growing interest from borrowers who are wary of over-leveraging.

For example, we were recently approached by an acquisitive financial services provider who was uncomfortable with the idea of taking on significant leverage given where we may be in the cycle. They also sought a flexible solution with a redraw feature on a Committed Acquisition Facility, allowing them to save on interest costs following periods of significant cash generation. This highly bespoke solution offered them fire power for acquisitions but also allowed them to capitalise on the variability of their likely drawing profile to save on interest costs versus a traditional unitranche solution.

Other borrowers might simply want to maintain financial discipline.

We recently funded a sponsor-backed business which was concerned that with interest rates on the rise, a 100-150bps price differential across a large debt stack would become meaningful and create a significant interest burden on the operating company. With stretched senior debt, the borrower was able to take comfort from a lower margin, providing an extra financial cushion.
 

What next?

Although stretched senior financing remains something that only a limited number of lenders can offer, there are good reasons for considering it when evaluating your funding options.

Callum Bell
Callum Bell

Although stretched senior financing remains something that only a limited number of lenders can offer, there are good reasons for considering it when evaluating your funding options.

 

To find out more, and to access further case studies, please contact us directly, and we’ll be happy to discuss whether stretched senior financing could give you the flexibility you need without over-leveraging.

 

1 Deloitte’s Alternative Lender Deal Tracker Report, Autumn 2021

If you would like to find out more, contact Callum or Helen

If you would like to find out more, contact Callum or Helen

Callum Bell

Callum Bell

Head of Direct Lending

About Investec Growth & Leveraged Finance

Investec Growth & Leveraged Finance provides financing to businesses (typically with EBITDA £2m-£75m) in the UK, Ireland and mainland Europe.

Finance provision is typically event driven and includes growth capital, acquisition finance & management buyouts, leveraged finance & syndicated debt, refinances & recapitalisations and structured corporate lending. Structures are typically senior secured debt and unitranches, integrated asset-based & cash flow solutions, subordinated debt and minority equity, working capital and capex/acquisition facilities with the ability to provide underwrites and/or bridge structures where a client need exists.

Financing is provided both from Investec’s balance sheet and our dedicated fund, Private Debt Fund, which was raised in early 2020.

 

This is for information purposes only and does not constitute an offer or commitment, a solicitation of an offer or commitment, or any advice or recommendation, to conclude any transaction (whether described in this document or otherwise). This document does not constitute an offering document and does not purport to contain all of the information that an interested party may desire.

Investec Bank plc whose registered office is at 30 Gresham Street, London EC2V 7Qp is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, registered no. 172330.