Private Credit
What is Private Credit?
Private credit, or direct lending is an area of alternative credit that has been growing hugely in recent years. Investors looking for yield have realised that lending privately can deliver decent returns and as such, institutional capital has been flowing into the private credit markets in recent years.
Private credit comes from non-bank lenders and is tailored to the borrowers’ specific requirements, which makes it a bit more difficult to characterise in specifics.
The term is usually 3 to 7 years and it is likely that the cost of the credit is on a variable interest rate, although that is not for certain. Private credit lenders will usually span ABL and Asset Finance, and will often look to be collateralised in some form, although at FBX we have worked on transactions that are collateralised on everything from future contracts through to company real estate.
Who is it suitable for?
The appetite of private credit lenders is strongest for established private businesses with strong balance sheets and a PnL that supports affordability over a multi-year term, although there are private credit lenders who will step in and issue credit to help support, save and turnaround businesses in peril.
Lenders will look at EBITDA performance, the loan to value on assets (or future cashflows) and look at other borrowing, its position within the debt stack and available security when assessing whether to issue terms or not.
Usually however, the private credit markets are for these established businesses looking to solve an issue such as a growth phase or a lengthening trade cycle or seasonal cycles that are impacting cashflow for whatever reason.
Businesses that can readily access private credit also tend to be in the zone where macro-economic factors can be catastrophic and often private credit providers will be able to step in and take a longer term view of it – an example of this would be supporting retail businesses during the COVID-19 lockdowns of 2020 and 2021.
FBX have also found great use for the private credit markets in refinancing bank debt, either in cases where syndicated facilities are complex to manage or in the case where the appetite of the bank is not in line with the company’s growth plans. There is no doubt that credit providers tend to be more flexible than the banks.
Furthermore, private credit providers tend to be industry specific, or at the very least have industry specific teams. Of course this means that they can get a more experienced handle on the business, sector and industry than a bank would be able to.
What is the process?
Private credit providers will take an extensive look at the business that it is looking to lend to and going through the process can be relatively time consuming. (the editor points out that this is why savvy business owners use someone like FBX to manage the process!). Lenders tend to go into a lot of detail and deals will take a minimum of 4 weeks from the term sheet stage to complete due diligence and legals.
At FBX we break it down into 4 distinct processes – Scoping, Negotiation, DD & Payout The scoping process will be to understand the business and engage suitable lenders, which will be followed by some 2-way ‘get to know you’ calls and top level financial sharing. The hope is that one or more lenders will then make an offer of terms, which will then be negotiated, we normally suggest 4 weeks from engaging lenders, management will be in a position to make an informed decision. Once preferred option has been chosen, term sheets are signed and we move to the DD process, which will cover financial DD, very likely including on-site survey and in-person meetings. Concurrently, the lawyers will be doing their bit and getting the terms in place, which then leads directly to pay-out. In our experience this is a minimum of 4 weeks from the dd process starting.
Private Credit is not something to take on lightly, so to find out more, feel free to book in a quick chat with one of or experts.
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