“As bank lending gets scarcer, CFOs need to know how to approach Capital Markets”

Interview #26 with Benoît Fally, CEO of Private Lending

Arturo: So, Benoît, how would you define Private Lending in a few words?

Benoît Fally: We are a B2B marketplace lender connecting corporate borrowers (especially CEOs, CFOs and treasurers from mid-cap firms) with professional lenders (being insurance companies, pension plans, family offices, and High Net Worth Individuals).

So you don’t hold any funds on your balance sheet (i.e. you don’t take any credit risk).

Exactly. We put borrowers and lenders in touch, which is another way to do it. In such a low rate environment, this is the optimal way for investors to optimise their net returns, as corporate structure’s cost base (asset manager, custodian,…) erode the yield.

Why CFOs, Treasurers and CEOs should put more attention in alternative lending or direct lending?

Mainly because, here in Europe, we are starting a transition from bank financing to capital markets financing. Corporates that in the past years had access to cheap bank loans have seen how some banks stopped serving 100% of their needs. We want to provide a capital market alternative to these companies, now and in the future.

And what are the main drivers of this trend and how will it evolve in the coming years?

Before explaining to you the main drivers, let me first point out that the current capital structure of the corporations in Europe, compared to US and China, is an “anomaly” that needs to be reframed. I think the average capital structure for US corporates is composed 20% of bank loans and 80% of a mix of corporate debts, junk bonds, high yield-private loans, etc., while the capital structure of an average corporate in Europe is the reverse.

That being said, I would mention two key factors regarding why this setup is being transformed. The first one relates to the fact that sooner rather than later, Europe’s liquidity abundance derived from the quantitative easing (ECB Draghi’s 60b monthly purchase of assets) and the low-interest rate environment will end up, drying out credit.

And second, some of the post-crisis legislation coming soon that the regulator is pushing to make banks safer, like Basel III, will have an impact in the same direction. Basel III, for instance, implies that banks’ core Equity Tier1 (the cushion they need to cover potential losses) will have to be doubled, which means in turn that some segments of the economy will get less financing.

Are corporates experiencing this credit dry out already?

Indeed. Already during the crisis, many companies missed banks’ covenants because they did not respect a certain ratio of net debt to EBITDA, so some credit was denied, and they had to look for other alternatives.

Besides that, banks had to cut lending is some sectors, in Real Estate for example where they have passed from serving 100% of their corporate client needs to 70%.

That’s one of the reasons why we created Private Lending, i.e. to give a choice to those corporates that are facing (or will face) this scenario.

Savvy CFO’s know that the current monetary policy will come to an end and are already diversifying their sources of financing.

So, we should expect European banks to stop offering certain products. Which are the main ones? What are the implications for other players in the ecosystem?

I think the products which are going to be eaten are mainly ‘working capital financing’ and ‘revolving credit’. Revolving credit, because it’s a long-term credit line that even though corporates may not end up using, the bank needs to set it aside as liabilities on its balance sheet (so it weighs heavily on the core equity tier 1 of banks). If this product disappears from the corporate tools, they will need to find other ways to finance their investment in the long run, for instance with corporate debt.

Regarding the opportunities for other players, check the US case. Banks there are much more specialised, i.e. your investment bank deals with corporate debt or your investment fund is specialised in private equity. But here in Europe, we have huge generalist banks, or in other words, massive behemoths covering all segments of finance (asset management, loans, credits, factoring…). And obviously, if they stop doing and serving all these activities and products, all these areas which they let go off will become opportunities for Fintech like us.

And how can alternative lending players, as Private Lending, play a role in this scenario?

We support the client in three phases. First, we help them to present themselves to the capital markets, understand their rating and the types of rates they can expect to pay according to it.

Second, there’s the whole process around the loan documentation. Again, they have been used to syndicate loans with the banks, but when you go to the capital markets, you need a different type of legal documentation, and we help them with that too,

And of course, number three, we give them access to lenders and investors.

What could the CFO or the treasurer do otherwise?

I’m talking here mainly about CFOs of mid-caps (and small) firms. The usual case is that these kinds of corporates have almost zero experience on how to go to the capital markets (mainly because bank money has been cheap and abundant until now). On the continent, one of their main roles has been making the business plan with the CEO at the beginning of the year, determining what the financing needs of the company would be, issuing and sending an RFP to the largest banks in the country, and then putting them in competition to get the loans. However, as I explained before, this situation will change and they will need to acquire new skills as quantitative easing disappears and bank lending becomes scarcer and more expensive.

Large, well-capitalized companies have fewer problems. They would hire Fitch or S&P getting their rating and a bank for the distribution. But I don’t think mid-cap CFOs have that alternative. Right, they can organise a (public) retail bond, but again, you need to have rating agencies (with the subsequent invasion of their accounting department plus a fee that goes easily to 200k). And then they also need to structure a loan, draft a prospectus, get the approvals of the financial authorities, pay the bank for the arrangements (commission of 1%) and then pay the bank for distribution (to check the shakers and movers and sell the paper).

This process is very costly, both in terms of money and time. Of course, if you want to borrow 300m, it is not an issue (because absorbing a million out of 300 is not a problem), but absorbing a million out 10 or 15, can ruin your P&L.

We’ve been talking about the client side (mid-cap CFOs). What about the supplier of the credit?

We want to stick to B2B, so we remain in a more professional environment, perform a technical analysis, and put only in contact professionals with professionals, so we avoid some of the challenges that we’ve seen with other B2C or C2C marketplace lenders.

This means that we put corporates in contact with non-bank investors who are likely to lend to them. These could be family offices, insurance companies, pension plans, investment funds, etc.

Many of your clients come from banks that are not serving them due to the reasons highlighted before. Does this mean that banks don’t see you as competitors?

What is interesting is that some of the lenders (or investors) that are approaching us now are actually banks, since they try to find pockets of investment outside of their balance sheet. Many banks are extremely clever to anticipate the impact of a reduced capacity to lend in the future and therefore, they see alternative lending as an opportunity more than as a threat, looking at it as a complement to what they do. Some banks are even redirecting to us the clients that they cannot serve 100%.

Originally published at www.kantox.com on October 20, 2017.