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Leveraged finance: stepping into the void

Category: CLOs Regulation Risk Management


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Contributed thought leadership by Ocorian

As funds continue to reallocate capital to direct lending strategies, Sinead McIntosh, business development director at Ocorian, a global leader in corporate and fiduciary services, fund administration and capital markets, highlights the crucial role of independent loan service providers in streamlining fund loan portfolios

In a continuation of the legacy of the 2007-2008 global financial crisis, large commercial banks remain distanced from lending to middle-market and lower-middle-market companies. Their successors, collectively known as 'alternative lenders' and largely made up of private debt funds, continue to fill the void left behind by providing the necessary capital for businesses seeking alternative sources of financing.

Institutional investors are increasingly engaging with these non-traditional debt options. They provide higher-yielding, shorter-term investments than public bond markets and have low correlation to public market volatility.

However, market uncertainty over the implications of Covid-19 and subsequent government stimulus saw direct lending deals completed in Europe in 1H20 fall by 29%, compared to the same period last year. This put the brakes on an increasingly competitive private debt market, with companies instead able to raise money from cheaper public debt markets. 

But fiscal support is now withdrawing and commercial banks are continuing to retrench, becoming increasingly risk averse and focusing on managing their existing portfolios. Moreover, optimism around a Covid-19 vaccine is returning confidence to markets. Together with pent-up demand and an absence of deals, alternative lenders are seizing the opportunity to step into the leveraged markets the banks have less appetite for, competing to deploy capital.

Growing pains
Every crisis brings with it an opportunity for reinvention, innovation and collective agility. And those firms that pivot to direct lending strategies with adequate scale, capital and expertise will be the most successful. However, many mid-market funds looking to diversify to direct lending strategies do not have the internal resources and expertise necessary to manage and rapidly upscale a large portfolio of loans.

Direct lending is a fast-paced market and the pressure to get to market quickly and deliver can create operational risks for under-resourced funds. But running loan books on inefficient systems can significantly hamper the effectiveness of a fund's operations, carries considerable operational risks and limits scalability. Focusing on these non-core operational tasks also drains internal resources that could otherwise be applied to revenue-generating activities.

Engaging with an experienced and responsive independent loan administrator can help eliminate the operational challenges and risks mid-market direct lending funds face. This can result in optimised operations and improved data and reporting quality.

Increase deal flow and reduce risk
Ocorian provide a complete end-to-end loan agency and administration package to direct lending funds. By blending our team's deep commercial experience with cutting-edge private debt software, we act as a seamless extension of in-house transaction teams.

This enables the effective management and oversight of loan portfolios and provides real-time data and dashboards for bespoke finance, management and investor reporting. Our scalable and operationally robust solution can be used across asset classes to instil efficiencies and allow firms to focus on their core business.

For more information about Ocorian's loan agency and administration services for direct lending funds, visit ocorian.com.

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