Debt funds carve out niche in Polish lending market

Private equity players in the CEE region have historically had good access to leverage, with banks willing to lend in the local market. This has limited the number of direct lending funds and thus curbed the amounts of capital they are lending, but a recent report by Deloitte suggests an increasing presence of private debt managers specialising in the Polish mid-market. Their strategy, according to the report, is to get involved in smaller, more complex deals and provide more leverage than banks are currently offering.

"The emerging direct lenders are being talked about," says Bill Watson, partner at Value4Capital. "It is a broader reflection of the market and it will be interesting to see which is more competitive." Watson is currently exploring debt financing options for an upcoming deal and says the team is looking at both private and traditional commercial options.

When it comes to international lenders, larger institutions are typically looking at exposure in the region on a broader scale, rather than on a country-specific allocation. Yet the number of local players raising debt vehicles is still limited. According to Unquote Data, two direct lending funds have been on the fundraising trail in recent years.

While banks offer the cheapest way to finance and are very liquid, they can also prove reluctant to finance high-risk projects" – Przemyslaw Kozdoj, Wolf Theiss Warsaw

CEE-focused private equity group MCI Capital launched its first debt vehicle, MCI.CreditVentures 2.0, in January 2017 with a target of $500m. Meanwhile, Estonia- and Poland-based BPM Capital held a €70m first and final close on its hard-cap for its maiden investment vehicle, BPM Mezzanine Fund, in January 2015.

While it may still be early days, the trend is obvious, says Przemyslaw Kozdoj, head of banking and finance at law firm Wolf Theiss Warsaw, adding that an increasing number of funds want to be active in the region. "While banks offer the cheapest way to finance and are very liquid, they can also prove reluctant to finance high-risk projects," he says. "When there is an issue with a project, investors will compare alternative sources of financing."
Furthermore, there could be more liquidity on the horizon.

Poland’s biggest insurer PZU, which last year purchased a stake in Polish banks Pekao and Alior from Unicredit, is making a move towards operating on the lending side. Says Mid Europa partner Matthew Strassberg: "While PZU is not seeking to replace bank loans, it is interested in participating in bank deals and getting into the dealflow." If PZU is successful, other insurers are likely to become more active in the lending space.

Banks still lead
Loans may be available from an increasing number of sources, but upper-mid-market deal makers are still relying on banks to provide the bulk of their debt arrangement, says Strassberg. "Debt arrangements are broadly led by and structured by banks, and private debt is used as an incremental product because no direct lender is yet able to offer a turnkey solution and fully underwritten structure," he says.

Local CEE banks enjoy much higher liquidity than in western Europe, and consequently are able to offer competitive pricing. This pricing, combined with the ability to fund in local currencies, gives the banks a competitive advantage over private debt providers. As a result, in the CEE region, private debt is primarily focused on the subordinated, second-lien or PIK layer of the capital structure, complementing traditional bank debt. And private debt does not compete head-on with western European banks offering complete alternative financing structures.

Nevertheless, the availability of additional finance has placed upper-mid-market buyers in a situation where transactions could feature enhanced debt levels.

Mid Europa typically starts with 4-5x all-senior, says Strassberg, and then might return for refinancing, which could include a subordinated loan. The investment team will leverage up to 5x, he says. "CEE GPs are scared of managing highly leveraged assets, they are still testing the waters."

In the lower-mid-market, valuations are more likely to be driven by optimistic advisers than by leverage, says Value4Capital’s Watson. "We have not been surprised by the bids seen in auctions, but we are surprised by the sellers where advisers are pitching higher prices."

While in other markets, cheap leverage has contributed to rising valuations, this is not yet the case in the CEE region. However, as competition in the local debt market grows, vendors may begin looking for more lucrative exits.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• CEE
• Debt
• Top story
• Poland
• Deloitte
• MCI Management
• Mid Europa Partners