Nordic alternative lenders step in as banks chase large-cap deals

One of the key attractions to Nordic private equity since the downturn has been its continued support from local banks. Following a deep recession in the early 90s, the region's banks implemented strict procedures to prevent another crisis, which ensured the impact was minimal during the 2008 downturn.

But though there is little danger of local banks deserting the region's asset class, it would seem traditional lenders are increasingly chasing large-cap deals. "The banks have returned to large transactions where leverage can be high, at least 5-6x of EBITDA, and competition is tough. The banks need to offer aggressive senior multiples with aggressive pricing to stay in the game," says Pertti Nurmio, managing partner of Nordic-based private debt provider Armada Mezzanine.

The cause of this spike in competition in the large-cap Nordic debt market is the increased availability of debt in general, including packages provided by Nordic- and London-based credit funds, as well as unitranche providers.

A gap in the credit market is appearing as traditional lenders focus on larger deals

Indeed, in addition to an upsurge of direct lenders targeting large-cap deals in the Nordic region, the market is increasingly taking advantage of the high-yield bond market for refinancings. The Nordic high-yield bond markets, and particularly the Norwegian bond market, are a hugely important part of the region's debt landscape. However, it would appear this form of debt is not commonly used for acquisition finance.

According to DLA Piper's European Acquisition Finance Debt Report 2014, just 7% of survey respondents based in the region thought high-yield bonds will become the most common acquisition finance debt structure this year. This is against 56% who selected senior, 26% who chose a combination of debt finance and high-yield bonds, while just 4% believed a combination of senior and mezzanine would take precedence.

Interestingly, of the respondents based in Europe (not in Scandinavia), 19% believe senior and mezzanine will be the most common structure in 2014.

So while bonds are popular in the current market for refinancings, it is clear they are less likely to be used for acquisition finance. Furthermore, there are some growing concerns around recent bond issuances. According to one practitioner, the quality of bonds that have been issued for refinancings in the Nordic region is not matching entry prices.

Small-cap gap
While local banks and non-Nordic direct lenders fight over large-cap acquisition finance and the bond market sweeps up the bulk of refinancing activity, a gap is materialising in the lower mid-market. One direct lender, Armada, has already seized the opportunity and is currently out on the road raising its second fund as an independent (it was previously owned by Eqvitec), targeting between €100-150m. Armada Mezzanine IV hit a €70m first close in May.

According to Armada's Nurmio, while investors from its previous fund are keen to reinvest into Armada's latest offering, it is crucial that the vehicle sticks to its target size of €100m with hard-cap of €150m. "We are targeting transactions in the lower mid-market remit, as that is the most active market in the Nordic region. There are lots of opportunities here and the banks are less aggressive in this segment."

Furthermore, Nurmio believes it is essential for the fund to have a strong local presence. "It is key that we cover all Nordic countries and we travel frequently all over the region to source deals."

As the competition between the banks and the alternatives heats up in the Nordic region for sponsor-backed deals, the diminishing attention paid to lower mid-market transactions has created an exciting opportunity for one local player. However, this may mean that, in their desperation to put cash to work, non-Nordic alternative lenders will also start moving into this market.

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• Topics
• Nordics
• Nordic debt
• Acquisition finance
• Senior debt
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