Nordic direct lending makes slow but steady progress

European direct lending funds raised €25bn in 2018, according to data from Unquote sister publication Creditflux. This was down slightly from the highs of 2017 when the figure was €32.5bn, but is still the second strongest year on record.

It is no surprise, then, that direct lenders have been increasing their market share relative to banks and finding more creative ways to deploy capital. In the DACH region, to cite one example, the use of first-out second-out structures – whereby funds partner with banks to provide unitranche facilities – have become widespread, meaning funds are involved in more than 50% of mid-market financings.

In the Nordic region the figure is much lower, as Andrew Cleland-Bogle at EQT Credit told the audience at the recent Creditflux Direct Lending event. "We believe somewhere between 10-20% of the Nordic opportunity set is currently compatible with what we have to offer, usually meaning that the banks do not have appetite for the risk, or are not able to provide the required flexibility," he said. "Within that 20%, direct lending funds will often also compete with the Nordic bond market."

The banks are still really active in the Nordic market and will often have sharp elbows to keep the funds out" – Andrew Cleland-Bogle, EQT Credit

Cleland-Bogle added that, unlike elsewhere in Europe, banks have been unwilling to work with funds. "The banks are still really active in the Nordic market and will often have sharp elbows to keep the funds out," he said. "We expect that to change to more collaboration over time, in line with other markets."

Mikkel Sckerl at Capital Four agreed with this observation and offered up an explanation: "Banks very much have the approach that, if they like a deal, they are going to take it because they are still looking to increase their market share. They have not seen any reason to embrace direct lending yet, so it is very much still an either/or situation."

Glimmer of hope
However, banks from outside the Nordic region that have embraced the concept in their home regions could look to partner with funds to push into the space. Sckerl said: "Some of the banks that are doing unitranche elsewhere in Europe are actually looking to do unitranche in the Nordic region as well. We have not seen many deals yet, but there is certainly dialogue around that and it will be interesting to see what the Nordic banks do."

Failing that, there will always be opportunities that banks cannot, or will not, take up. EQT Credit announced its first Swedish deal on the same day as Creditflux's conference, and Cleland-Bogle explained the rationale: "We announced our first direct lending deal in Sweden today – unitranche financing to support Summa Equity's acquisition of Olink. One of the reasons we were able to edge out the banks was because we were able to understand the business in a greater level of detail and, consequently, better assess the risk. We were able to do things by using EQT's unique industrial adviser network. We could not have done this deal without them."

Summa Equity's Tommi Unkuri told Unquote at the time of the deal that the business had potential bolt-ons in mind for the business, so the extra flexibility that funds can offer for growth financing was likely also a factor. Capital Four's Sckerl said this is a typical situation: "The appetite we see is from sponsor-owned businesses, and it really centres around being able to offer financing that is more flexible and has less amortisation than banks. We can be more competitive for deals growing at a healthy pace. Instead of using their cashflow to amortise the bank debt, if they have non-amortising or less amortising structures with potential to do acquisitions and so forth that can be used to support the growth."

Ending the session on a positive note, EQT's Cleland-Bogle predicted a healthy future for direct lenders in the Nordic region, even if the growth rate of the opportunity pool is likely to remain modest. "Banks generally have a red light green light mentality, so if something happens to trigger the red light it will be open season for funds to pick out the good assets. However, even without a red light for the banks, funds will continue to increase their market share, as borrowers become more educated on the advantages that direct lending packages can provide."

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