Keeping one eye on the Aussie debt market

2019 has continued to see the prevalence and growth of credit funds and non-bank institutions in the Australian debt market.  In a continuation of their emergence in 2017/2018, these institutions are now offering significant volume in sub-investment grade credits.

This has driven the growth in the use of unitranche, structurally subordinated mezz and other stretch senior offerings.  Australian law, $Term Loan B (Australian law) products have also been used to finance event driven transactions for private equity sponsors.  Unitranche and Term Loan B offerings generally have the following features:

• Higher initial leverage coupled with higher margins (“stretched senior”).
• Usually maximum of one Net Leverage Ratio financial covenant with limited or no step-downs, and higher starting covenant headroom (40%+).  Sometimes this is now just a “springing covenant” which is only tested if the RCF is drawn above a certain level.
• Longer term – with tenors often 6-7 years.
• No amortisation (although often there will still be a cash sweep).
• RCF often provided on a super senior basis – although the providers may have limited voting rights.  Some of the non-bank institutions are now able to provide the RCF without the assistance of a mainstream bank.

Recent deals completed in 2019 or in the pipeline tapping such alternative sources of debt have included:

• Quadrant’s acquisition of Experience Australia
• BGH’s acquisition of Navitas
• KKR’s acquisition of MYOB
• TPG’s acquisition of Greencross

We have seen some of these offerings in NZ in 2019, including on some private equity sponsor bids for Hellers and TipTop.