When Anthony Woodhouse needed to refinance a bank loan and invest in his family’s 236-year-old brewery and pub chain, his advisers sent him to an insurer.
M&G Investments, a unit of Prudential Plc (PRU), the U.K.’s largest insurance company by market value, agreed to lend Dorset, England-based Hall & Woodhouse 20 million pounds ($33 million) for 10 years. As well as replacing the bank loan, the cash will allow the brewer of Tanglefoot- and Badger-branded beers to invest in its 220 pubs.
“It was quite clear that the bank market wasn’t available for the type of loan we wanted,” Woodhouse said in a telephone interview this week. “For us, the important thing was that the lender should be in tune with how we invest and our strategy for the business.”
While big businesses have never been better-placed to raise funding in capital markets, commercial banks seeking to conserve capital have reduced lending and created a void that new actors are now stepping in to fill. The bankers’ retreat has opened the door to buyout firms, venture-capital funds, insurers and pension providers.
“The brewery loan is indicative of a wider trend,” said Fenton Burgin, a partner at Deloitte Debt Advisory in London, who advised Hall & Woodhouse on its deal. “As bank liquidity withdraws from the market a range of alternative lenders are taking up the slack and the mid-market is going to be a good source of opportunities for them.”
For Hall & Woodhouse the key issue was the 10-year term of the loan, a period that wasn’t available from a bank.
“We invest for the long term and the banks would only lend for three-to-five years,” Woodhouse said. “We were also looking at broadening our investor base away from just the banks.”
M&G made the loan from a 500 million-pound fund set up to supply financing to established, mid-sized companies looking for longer-term finance, said James Pearce, the London-based head of direct lending at M&G Investments.
“We’re trying to offer a real alternative to bank financing,” he said. “We lend for the long term.”
Although alternatives to bank lenders have existed in the U.K. for years, the last 18 months have seen “very rapid development,” Deloitte’s Burgin said.
U.K. banks are less generous with corporate customers than their peers elsewhere in Europe, with British lenders having the equivalent of about 491 billion euros ($668 billion) committed to clients at the end of November, European Central Bank data show. French banks had about 864 billion euros outstanding.
“Company funding is much more of a patchwork now than in the past,” said Nick Badman, professor of entrepreneurship at Cass Business School in London. “I can envisage direct lending really taking off over the next few years.”
Banks are also starting to partner with fund managers to lend to small- and medium-sized businesses. That means the loans can be kept off their balance sheets even as they retain traditional, fee-generating business, such as revolving credit facilities, hedging instruments and checking accounts.
“We’ve been working with direct lenders for the past 12 to 18 months,” said Karl Nolson, head of debt finance at Barclays Plc (BARC) in London. “Post-crisis, they’ve been looking to broaden their business.”
Barclays said Jan. 10 it invested in a fund managed by London-based BlueBay Asset Management LLP to provide loans of as much as 120 million pounds to mid-market companies. The fund will make so-called unitranche loans, which combine senior and junior debt into a credit facility and have a single repayment at maturity.
The deals “can push leverage a little bit further than the banks are comfortable with,” said Anthony Fobel, head of private lending at BlueBay. “It’s still at a relatively early stage in the U.K. but it’s a very interesting development.”
A properly functioning U.K.-based private placement bond market would widen the range of options open to smaller companies, according to John Grout, policy and technical director at the Association of Corporate Treasurers in London.
“It’s a bad thing there isn’t a flourishing private placement market in the U.K.,” he said. “Unfortunately, lending to smaller companies is higher risk, with smaller rewards and higher costs, so it’s less attractive unless you’re a specialist.”
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