German debt market: a changing landscape

The aftermath of the global financial crisis has seen direct lending funds make their presence felt across Europe. In 2014, the number of unitranche deals more than doubled compared to the previous year, with German activity more than trebling from four transactions to 13, according to Altium Capital's MidCapMonitor. By cracking the notoriously risk-averse German market, alternative lenders appear to have proven their credentials.

"During the last crisis, most assets were refinanced via the classical banks in Germany. Debt funds only came in later," says Frank Jung, managing director at DC Advisory. According to Wolfram Distler, a partner at DLA Piper, the past 12 months have seen a spate of refinancings that inflated the figures for unitranche offerings: "We're seeing more unitranche deals here because the product is now established. The debt funds could present a track record of successful deals, completed mostly in the UK. A couple of years ago, nobody knew about them on the continent, but people in Germany are much more familiar with it now."

Enduring relationships
The increase in unitranche deals could also be symptomatic of a perceived lack of trust in local banks, which were the first port of call for many years. However, recent turbulence may have thrust loyal customers into the arms of the debt funds.

The German market has typically been dominated by the local Landesbanken, which underpin the stable lending environment in the country. These state-run institutions were particularly favoured by the Mittelstand, whose owners were more likely to trust their local banker, backed by the local authorities.

However, in 2001 the European Commission decreed the Landesbanken were unfairly advantaged and ended their unlimited guarantees from state governments. Moving away from their traditional Mittelstand focus into international securities, in order to maintain profits, proved costly when the economic crisis hit. After receipt of some hefty taxpayer bailouts, the banks faced further pressure last year when they were subjected to stress-testing from the European Central Bank.

A return to the traditional Mittelstand-focused model was implemented. The banks are concentrating on their regions, as evidenced by deals such as Deutsche Private Equity's purchase of Baden-Württemberg-based Ziegler in October last year: LBBW Landesbank Baden-Württemberg teamed up with Commerzbank to provide a debt package for the acquisition. "Landesbanken have been under pressure for many years, but my impression is that they are active again," argues Distler. "Banks have returned to liquidity; although their margins are under pressure they remain risk-averse. If the rating isn't that good, and the structure isn't simple, then many banks will probably refrain from doing deals. Then the debt funds come in."

Better together
Despite the higher costs associated with non-amortising unitranche debt, alternative debt fund managers "tend to have a much more entrepreneurial approach to a business than the banks", says Markus Ehrler, a partner at debt advisory firm Marlborough Partners. They can be tailored to fit a particular strategy and their small administrations mean customised packages can be agreed to quickly. Distler argues unitranche financings are likely to replace the comparatively more expensive 'senior plus mezzanine' offerings in many cases. He also suggests private equity firms will approach banks and debt funds at the same time in order to get the best deal.

"I think the existence of both bank debt and private funds can be justified, depending on the question asked of them. The two will increasingly be combined with banks taking a lower leverage on a senior basis with a unitranche structure on top. If it is done smartly, it can be a win-win situation all round," comments Ehrler. With the abundance of leverage options now on offer, banks will find themselves under ever greater pressure to provide cov-lite debt options and more bespoke packages to remain competitive. Flexible, untainted alternative debt managers look to be here to stay.

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• Topics
• DACH
• Financing
• Germany
• DC Advisory Partners
• DLA Piper
• Marlborough Partners
• Refinancing
• Unq2015May