Private credit: trends and opportunities

Direct/non-bank lending has long been a feature of the New Zealand real estate finance market, but it has now developed into other areas with the emergence of local private credit funds, as well as a large number of Australian funds active in the New Zealand market. 

Private credit’s growth presents different considerations, and not-to-be-overlooked opportunities, not just for those who access private debt (borrowers / sponsors) and those who make it available (private credit fund managers), but also for those who are impacted by its growth (including traditional bank lenders). The Bell Gully team explore some of these considerations below. 

BANK AND PRIVATE CREDIT FUND CO-EXISTENCE AND PARTNERSHIP TRENDS 

Private credit and traditional bank lenders have often been seen as competitors, each with distinct advantages and limitations. However, collaboration between private credit funds and banks is a growing trend. This evolving relationship is transforming the debt market by: 

• leveraging strengths from both sides to offer more comprehensive financing solutions for borrowers; and
• at this stage more commonly outside of New Zealand, optimising private credit fund performance through their own use of bank debt (i.e., traditional banks lending to private credit funds). 

Some examples are set out below:

Funding the funds: private credit funds can benefit from incurring their own debt, including in the following forms:   

• • Subscription lines: debt provided against committed capital of an investment fund to bridge capital calls, assist with rapid investments and meet other liquidity needs. This product is common overseas (including in Australia) but currently is less so in New Zealand. The speed at which committed bank debt can be drawn (one-two day drawdown periods), compared to investor call notice periods, makes this an attractive product for funds managers. 
  • Net asset value (“NAV”) facilities: debt provided against the net asset value of an investment fund’s portfolio for various purposes, including providing asset-level support, and financing follow-on investments. Again, this product is common overseas but is currently less common in New Zealand. Often deployed when a fund is invested, it provides an alternative source of liquidity for fund managers later in a fund’s life-cycle. This structure can be implemented for various fund categories, but is particularly popular with credit funds, given the familiarity of bank lenders with the underlying assets of those funds. 
  • Loan-on-loan facilities / back-leverage: debt provided against a private credit lender’s loan book, typically for the purpose of on-lending. This type of arrangement is more common in New Zealand. 

Partnership to provide products unavailable though private credit: in addition to private credit lenders participating in lending syndicates alongside banks, private credit lenders often partner with banks to provide debt and other products that private credit funds typically do not, such as:

• • Revolving credit facilities (RCFs) / super-senior RCFs.
  • Letters of credit and other trade products.
  • Hedging and FX lines. 
  • Agency functions.

In addition, the growing presence of credit funds can provide bank lenders with greater flexibility to exit positions that may no longer fit within mandates, potentially providing greater liquidity for bank lenders.  

A SPONSOR / BORROWER PERSPECTIVE

Private credit’s emergence has unquestionably given sponsors / borrowers more to think about when it comes to arranging their debt financing, and ultimately a wider range of debt options. 

Some features of private credit financing transactions that sponsors / borrowers might consider are:

• Flexibility on terms and debt for unique investment opportunities: a key (and well-documented) draw to borrowing from a private credit fund is its ability to offer a more customised financing solution for financing needs. One factor that has a meaningful impact on the ability of banks to tailor financing solutions is the way those solutions will be treated for regulatory capital purposes. Private credit funds do not have the same driver so this facilitates flexibility in tailoring financing and terms and can provide an ability to provide more esoteric financing structures.  

Some examples are:

• • Loans in respect of assets suitable for long-term, patient debt. 
  • Loans in respect of distressed assets.
  • Loans benefitting from less, or subordinated, security (eg, mezzanine financing or holdco / midco loans).
  • Loans with exposure to “tailored” covenant levels.
  • Loans with less reporting or monitoring (e.g., development loans for a quantum that does not justify onerous or costly project monitoring).
  • Bridging loans.

• Deal execution: given the direct nature of private credit lending transactions, negotiation and ultimately deal execution can often be achieved in an efficient manner. 
• Amortisation and interest payments: because private credit lenders are motivated to maximise their investors’ capital by having it earning returns for a longer period, private credit loans are less likely to feature amortisation. For the same reason, payment-in-kind interest is often offered. Sponsors / borrowers seeking to minimise debt servicing during the course of an investment are attracted to this feature.  
• Call protection: related to the above point, to ensure a minimum return on their investment, private credit lenders will often require “call protection”, for example in the form of a make-whole fee or premium. 
• Super senior structures: on leveraged finance transactions where acquisition debt is advanced by a private credit lender, we commonly see traditional bank lenders provide a revolving credit facility on a super-senior basis (seeing as traditional bank lenders, who are not subject to the same investor capital call notice period which private credit funds might be, are better placed to make advances on shorter notice).
• Liability management exercises: not unique to private credit lending transactions, the expectation is that private credit lenders will be increasingly focused on protecting against liability management exercises (e.g., including Serta, Chewy, J. Crew and Healthscope blockers).

SUMMARY AND CONCLUSION

While private credit lenders are invariably competing for lending mandates in the New Zealand debt financing market, they also present opportunities for partnership with traditional bank lenders and enable borrowers to access debt options that may otherwise be unavailable, or on terms they may otherwise not be able to achieve.  

Bell Gully has acted on many of New Zealand’s most significant financing transactions, acting for borrowers and lenders not just in the traditional bank lending and private credit transactions, but also in bespoke debt products including fund finance (subscription lines and NAVs) in the Australian and European market, loan-on-loan / back-leverage facilities, holdco/midco facilities and super-senior RCFs. 

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.    

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.