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Alternative credit is here for the yield

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Institutional private credit is emerging as a competitive substitute for bank lending in Europe, but companies need to remember that alternative lenders define what they are looking for more narrowly than banks.

In the UK particularly, several market sources — institutional investors, direct lenders and loans bankers — have said banks are retrenching from lending to mid-cap companies. Alternative lenders can now often beat the banks on price, structure or both.

It is important not to exaggerate this — banks are still the main lenders to mid-caps — but there is a definite disintermediation pulse.

This week, US insurance company MetLife provided, on its own, a £118m facility to the English Football League, its first debt issue in its 133 year history.

Though it has been common for years to hear the cry that what Europe needs is US-style capital markets, relying more on institutions than banks, it is important to stay level-headed.

If alternative lenders can offer bespoke financing that banks are not prepared to do, that is good for companies. But this is still a small and young sector.

Private credit has weathered the pandemic. But there have been tensions. UK companies that have undergone debt-for-equity swaps with direct lenders in the past 12 months, include Fat Face, New Look and Paperchase. Other companies with private placements, such as Sodexo, struggled to negotiate with investors about waiving covenants.

For these investors, a company is ultimately just a deal. For banks, it is a more rounded relationship. Banks have many services to offer and thus an incentive to stick with companies. They are not perfect, but in aggregate, have proved their worth through many cycles. Alternative lenders have yet to do so.

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