Thu 01/28/2021 12:24 PM
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Banking consolidation in Spain, as well as the impact of Covid-19 on nonperforming loans are expected to provide more opportunities for direct lending funds to deploy capital in the country. The trend over recent years has led those institutional lenders to become more prevalent in a market which has traditionally relied on bank financing, sources said. Continue reading for the EMEA Middle Market by Reorg team's update on banking consolidation in Spain, and request a trial for coverage of stressed, distressed and high-yield credits in the region. 

“Five years ago, the sector of private debt in Spain was dominated by banks, now there are more alternatives to structure new financings and refinancings like the combination of debt facilities provided by banks, debt funds and insurance companies,” said Javier García-Palencia, managing partner and head of the debt capital markets team at Alantra. “We anticipate more of these combined structures going forward.”

The number of Spanish lenders fell from 55 in 2009, at the peak of the financial crisis, to 12 remaining as of June 2020, according to data from Banco de España. Mergers in the sector are continuing including the CaixaBank and Bankia’s deal which will close this year, as well as the Unicaja and Liberbank merger, among others.

After a merger, banks restrict their credit supply, especially at the expense of small and medium-sized firms, according to research from Banco de España. The Covid-19 pandemic will add to the banks challenge in assessing their stocks of NPAs, according to data compiled by S&P. This could make traditional lenders reluctant to assume further risk outside of the most resilient sectors.

Ares Management’s European direct lending team, which has six originating offices and managed $36.6 billion of total assets as of September 2020, opened an office in Madrid in 2019. Mike Dennis, co-head of European Credit at Ares Management’s Credit Group said the move was a natural extension of the U.S.-headquartered direct lender footprint in Europe. “This positions us to take advantage of the Spanish market which is experiencing the same bank to direct lending market share shifts that we have been seeing across other markets in Europe since the global financial crisis,” said Dennis.

Other funds have also headed to Spain, Pemberton officially opened its office in Madrid in September 2020. As of December, Pemberton’s total portfolio in Spain was €740 million. Tikehau Capital opened an office in Madrid in 2017 and Capza in 2016.

“The Spanish direct lending market has shown steady growth during the last several years, becoming the 5th largest market in Europe,” said Dennis. “Ares has been benefiting from growing deal volumes in the region for some time and we are excited about future deployment opportunities.”

According to Deloitte’s Alternative Lender Deal Tracker Autumn 2020 report, Spain has recorded 118 direct lending transactions between the fourth quarter of 2012 and the second quarter of 2020.

International funds contributed 81% of total investment for the year 2019, totaling €6.87 billion, all-time investment high by both volume and number of investments, according to the 2020 report of Asociación Española de Entidades de Capital-Riesgo, or ASCRI.

As a result of the increased presence of funds in the market, unitranche has now become mainstream where term loan A were the backbone of Spanish financing packages for a long time, sources said. Senior bank TLB lending is making headways via new entrants or senior lending funds joining syndicated facilities, with even some local funds raising specialized instrument vehicles.

“Whilst in recent years such TLBs would equate to 30% of total term debt in a deal given the limited number of suppliers, that is not the case now. As an example our first deal in 2020 saw a structure 85/15 TLB /TLA, which was almost completely back-ended given TLA on its turn had 35% balloon component, and was made on the back of capturing full TLB liquidity available by structuring a bifurcated piece one tranche for banks one for funds with bespoke conditions,” said Pedro Manen de Solà-Morales, managing director and Head of Iberia at debt advisory firm Marlborough Partners.

Manen de Solà-Morales said that bank TLB-strong structures are possible now in the context of leverage which is generally one-notch below where unitranche gets - that is for leverage around 4.5x versus the up 5x-6x which is unitranche’s natural territory.

Banks are continuing to find ways to maintain some sticky relationships with medium to small businesses. Banco Santander-backed private equity fund Tresmares Capital is an example of a group which provides multi-instruments including a range of bank loans, private debt and venture capital focusing on small and medium-sized enterprises.

“Tresmares deployed over €340 million in Spain from April to December in 2020. A total of €50 million related to the private equity activity and €290 million in private and traditional debt in 22 transactions,” said Borja Oyarzábal, co-founder and CEO at Tresmares Capital. “We are expecting a similar deployment in 2021 in Spain.”

--Lucía Camblor
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