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Ares forges ahead with €6.5bn private debt fund
Loans Cash pouring into direct lending funds as opportunities growBY DAVID BROOKEARES MANAGEMENT’s new record-
breaking €6.5bn European
private debt fund shows that cash
is continuing to pour into the
sector, challenging lenders to
maintain discipline as the market
grows ever more competitive.
Several European private debt
funds have broken fundraising
records since early 2017. Ares
new direct lending fund – the
lRMSûFOURTHû
ûGIVESûAûTOTALûOFû
€10bn to invest including
leverage, which will allow it to
make far larger commitments.
“It is now possible for us to
write a €500m ticket,” said
Michael Dennis, co-head of Ares
European direct lending.
4HEûlNALûSUMûISûMOREûTHANû
twice the size of Ares previousfund, and is in line with its peers as
THEûINDUSTRYûRAMPSûUPûITSûlNANCIALû
lREPOWER ûDEFYINGûNAYSAYERSûWHOû
PREDICTEDûTHATûTHEûmEDGLINGûMARKETû
would be short lived.
Alcentra last year raised
€4.3bn for its second fund, triple
the size of its predecessor, and
ICG has €5.2bn available to
invest, up from €3bn raised in
2015.
(AYlNûANDû"LUE"AYûALSOûRAISEDû
record sums for direct lending
vehicles last year, raising €3.5bn
and €3bn respectively.
In a market awash with
liquidity, concerns about the
effects of competition are
growing, as funds become more
accepting of looser loan
documentation and are willing
to offer higher leverage
multiples to win deals.A third of private debt managers
on both sides of the Atlantic are
willing to complete deals at seven
times leverage, according to a
SURVEYûBYûLAWûlRMû0ROSKAUER
Direct lending funds continue to
RELYûONûPRIVATEûEQUITYûlRMSûTOû
source transactions. While there
has been growth in non-sponsored
corporate transactions, advisory
lRMû'#!û!LITUMûSAIDûTHATûhTHEû
non-sponsored market is still very
small, given the enormous size [of
the middle market]”.
Lenders are already running into
problems with portfolio companies.
0EMBERTON û0ERMIRAûANDû!VENUEû
recently took control of French
luggage company Delsey, as did LGT
with online retailer sofa.com. And
the private debt market has not
been immune to hits in the UK
retail and casual dining sectors.“Some funds are taking a
portfolio approach to the market
and they’ll get a nice credit here
and there, but others are
absolute howlers. They spread
their money across the market
and a few will go wrong,” one
fund manager said.CONTINENTAL DRIFT
The pressure to deploy capital
has been relieved by a growth in
Continental activity outside the
UK, which remains the most
mature, active and competitive
private debt market, as banks
continue to retrench in Europe.
Middle market companies in
France and Germany are
continuing to open up to
alternative sources of capital as
lawmakers have relaxed
restrictions on alternativeLoan market to reprice if Libor is replaced
Loans Treasurers to face difficulty calculating borrowing costsBY ALASDAIR REILLYA staggering US$4trn of
outstanding syndicated loans
may have to be repriced if Libor
is discontinued, because
replacement rates could be
substantially lower than the
existing benchmark.
Libor provides an interest rate
benchmark for nearly all
syndicated loans, FRNs and
derivative products, as well as
intercompany loans and other
types of commercial contracts.
Its replacement will affect
every loan contract and make it
MOREûDIFlCULTûFORûTREASURERSûTOû
calculate their borrowing costs.
h4HISûISûAûSERIOUSûCASHmOWû
management issue for corporates,”
a loan syndicator said.
Since banks were found to be
lDDLINGû,IBORûSUBMISSIONSû
before, during and after the
lNANCIALûCRISIS ûREGULATORSûHAVEûbeen pushing to replace Libor
with substitute rates that are
based on actual transactions and
less open to market abuses. They
have set a deadline of the end of
ûTOûlNDûAûSUITABLEû
replacement for Libor.
Libor is likely to be replaced
with risk-free rates such as the
Secured Overnight Funding Rate
for US dollar loans and the
unsecured Sterling Overnight
Index Average for sterling loans.
Libor is a forward-looking term
rate based on one, three, six and
12-month contracts. It provides
certainty of funding costs
because the interest payable and
tenor is known in advance, and
also offers lenders premiums for
longer-dated maturities.
At the moment, the new RFRs
are backward-looking overnight
rates, which do not take banks’
cost of funds or credit risk into
account. They also do notcompensate lenders for the
length of the contract and are
priced lower than Libor.MIND THE GAP
The gap between the rates and
the lack of detail will make it
harder for company treasurers to
predict the cost of their debt and
match funding, bankers said.
h)TSûCERTAINLYûNOTûIDEALû"OTHû
lenders and borrowers need to
know how much will be paid on
a loan. It’s important for
CASHmOWûMANAGEMENT vûAûSENIORû
banker said.
"ASEDûONûHISTORICALûDATAû
calculated by the Federal Reserve
"ANKûOFû.EWû9ORKûANDûCITEDûINûAû
report from Fitch Ratings, SOFR
could be as much as 75bp below
Libor, which would require loan
pricing to be hiked to maintain
the original return on a loan.
"ORROWERSûANDûLENDERSûHAVEû
already been amending existingcredit documents to include
Libor replacement language
before the 2021 deadline.
Although the amendments
give a mechanism for
establishing new base rates, they
do not effectively address the
revisions to the credit margins
that will be required, Fitch said.COMPLICATED
The Libor replacement process is
complicated by the fact that
credit agreements and lenders
have different levels of consent
rights which need to be agreed
when agent banks and borrowers
agree a revised base rate.
Lenders often have negative
consent rights on revised base
rates and are seen to have agreed
to the new rate if they do not
object within a limited
timeframe. Lenders also
sometimes have additional
consultation rights.