New Regulations Forcing Structural Change in Industry
Institutional investors have a growing opportunity to provide loans directly to European mid-sized companies as European banks reduce their lending, according to Alcentra, the sub-investment grade investment specialist for BNY Mellon.
Alcentra's comments are published in its January white paper, European Banking Changes Create New Opportunities for Direct Lending, which notes that new regulations are driving European banks to cut back on lending to mid-sized companies. The pullback by the banks has created the opportunity for new lenders.
"Becoming a lender to mid-sized companies can be particularly compelling to institutional investors,"? said Graeme Delaney-Smith, head of European direct lending and mezzanine investments for Alcentra and author of the report. "We believe institutional investors are able to demand more attractive terms than in the broadly syndicated loan and high-yield bond market, although this is at the expense of liquidity."
In Europe, banks account for a substantially greater share of corporate financing than in the United States, the report said. As banks continue to deleverage to meet the new regulations, credit will become less available to companies that need it, according to the report.
The report notes that European governments recognize the need to provide sufficient credit for middle market companies and have launched programs to encourage greater non-bank lending to fill the gap. In the UK, Alcentra is one of four investment firms participating in the HM Treasury's recently launched Business Finance Partnership program to invest up to 1.2 billion pounds for loans to mid-sized businesses operating in the country.
While the report focuses on the opportunities available to institutional investors, it also cautions that these institutions should undertake highly detailed credit analysis of the borrower before investing. Delaney-Smith said, "As this is a specialized market, we believe investors seeking to maximize returns and avoid default risk should work with experienced managers who can perform the credit analysis and leverage their expertise in this market."