Alternative lenders embrace SMEs as banks retreat

Louise Bowman
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ECB executive board member Benoit Coeure has said that the central bank does not have a "magic wand" that can revive bank lending to small and medium-sized firms in Europe. But there are plenty of others willing to take their place. As the UK government turns to the regulators’ old nemesis – securitization – in its attempts to stimulate lending, institutional investors are taking matters into their own hands.

Alan McPherson is the chief executive of Tensator Group, a producer of queue-management products, such as retractable posts used at airports and point-of-sale display units. The firm employs 350 people, has its headquarters in the UK and has offices in the US, Germany, Poland, Paris and Dubai. Although successful and determined to expand, it is typical of many small and medium-size businesses in the UK and Europe in struggling to raise financing from traditional bank lenders as they delever. 

Benoit Coeure, executive board member of the European Central Bank (ECB)
Even as banks continue to claim that loan demand from creditworthy borrowers is weak, the search for financing for Tensator’s recent acquisition of Portuguese queue-management and self-service solutions provider Newvision led the company to change from its longstanding UK high street bank lender to an asset manager. That is a big decision for any company, and it was one that Tensator had been considering for a while.

“Our relationship with our bank deteriorated significantly  after 2008,” McPherson tells Euromoney. “Our relationship manager changed, and the discussion around business development was limited to doing the minimum to keep the business running, as opposed to working together to find new growth opportunities and transform the platform from a hardware provider into a solutions leader. Essentially, we felt the bank was reneging on the strategy we discussed and agreed upon as part of the original investment rationale.”

This experience chimes with anecdotal evidence elsewhere in the market. Banks are reducing credit, even to good businesses. One observer sums up the situation: “If you are a good credit with a £10 million facility from a bank and you go to them to renew, they will probably say yes. But if you go to them and say you want to increase it to £20 million to build a new plant, then they will probably say no.”


This certainly seems to have been Tensator’s experience. “Although financing of external growth had been part of the original plan with the bank lender, after 2008 they had no appetite for additional financing,” says McPherson. “When we presented what we believed to be a quality and strategically essential add-on target in 2011 it was declined, causing us to seek an alternative lender. Our objective remained to grow and build Tensator into the global leader in customer journey solutions. We were not satisfied to just do the minimum, for the business or for our investors.”

The firm subsequently secured acquisition finance from one of the asset managers now involved in the UK government’s  Business Finance Partnership (BFP) scheme. McPherson certainly seems happy with the change. He sees the acquisition loan not as a one-off resort to a new source of funds but, he hopes, the beginning of a more lasting arrangement with this new provider. “In its new relationship, Tensator has a lender who makes great efforts to understand and support the business and its development by being a financing partner, and not just us sending them covenant certificates at the end of each quarter. This makes it much easier to discuss business requirements as things develop.”

This is exactly the kind of relationship lending that high-street banks are supposed to specialize in. Tensator’s switch is an example of the profound change set to transform how companies raise finance as the banking system shrinks.

“The US savings and loans crisis blew open the US banking market. This is Europe’s savings and loans crisis and it will have the same impact on the European banking market,” says Anthony Fobel, partner and head of direct lending at BlueBay Asset Management, who is certain that the evolution now under way in European credit will be a lasting one. “In 10 years’ time Europe will not be an 80% to 90% banked market,” he predicts.

Anthony Fobel, partner and head of direct lending at BlueBay Asset Management

Fobel is referring not just to the disintermediation of bank lending to larger corporates and growth in corporate bond issuance. He sees a more important shift in how small and medium-size companies will raise loans. “Investors have traditionally been invested in liquid credit and illiquid private equity,” he says. “The growth in non-bank direct lending now offers them the opportunity to invest in something else: illiquid credit.”

BlueBay Asset Management is one of a small number of asset managers intensely focused on creating illiquid credit via direct lending to small and medium-size borrowers in the UK and continental Europe. “Most government initiatives are focused on firms that need to borrow less than £20 million,” says Arjan van Bussel, partner at boutique advisory firm Bishopsfield Capital in London. “The opportunity for alternative forms of debt finance is with corporates that need to borrow between £20 million and £120 million.”