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Australian financial sponsors now have a greater number of financing solutions to support their acquisition, refinancing and growth plans. This is good news for those looking for more flexibility in their debt structures.
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Australia enjoys greater diversity in specialised financing solutions

HSBC draws on global expertise to provide Australian clients with more options to meet their funding needs.

 

Scott Bannon

Head of Structured Banking, HSBC Australia

 

Australian financial sponsors now have a greater number of financing solutions to support their acquisition, refinancing and growth plans. This is good news for those looking for more flexibility in their debt structures.

In particular, the entry of structured financing products historically seen only in Europe and the United States (US) has given private equity–owned companies and mid-market financial sponsors the ability to choose a funding structure that suits their business requirements.

These products complement traditional options such as working capital financing and bank-financed leveraged buyouts, according to Scott Bannon, HSBC Australia’s Head of Structured Banking. “It’s about matching a debt structure to a business plan to get the best fit,” he says.

We have a breadth of capabilities to support mid-market private equity–led transactions: from deal origination to execution and providing ongoing coverage

Scott Bannon Head of Structured Banking, HSBC Australia

 

Alternative funding solutions

Structured financing options such as unitranche debt and asset-based lending (ABL) are part of a growing trend of non-traditional funding solutions for mid-market corporates. In offering these solutions, banks like HSBC usually work with global credit funds and other alternative lenders.

These products have been popular in Europe and the US but are fairly new in Australia. Unitranche, for example, has gained momentum in Australia only in the past two years, while the use of ABL has been growing for several years now.

Both these solutions are debt instruments. Unitranche’s financing structures combine senior and mezzanine debt into one blended product, and ABL – as the name suggests – is secured primarily by the company’s trading assets.

In the past two years, there have been around ten notable deals in Australia where sponsors used unitranche facilities for mostly leveraged buyouts. HSBC worked on about half of those deals, using its expertise and models in North America and Europe to provide clients with a consistent approach.

For unitranche deals, HSBC has provided revolving, capex and acquisition facilities as well as hedging and clearing services. The bank has also acted as a lead arranger and key financier in the asset-backed facility segment.

“We can take on various roles because we have global experience and precedents in product structuring,” says Bannon. “We don’t look at financing situations as one size fits all.”

Unitranche offers flexibility

Financing in Australia has changed meaningfully with the arrival of these non-traditional solutions, according to Bannon. They have provided more options for sponsors who want to get an extra turn of leverage, greater average maturity in the funding structure, or more flexible terms.

“For example, in unitranche debt, you can find funding deals that only have one financial covenant, as opposed to traditional bank structures that might have three or four,” says Bannon. “And because you might only have two counterparties to deal with, this can assist with speed of execution and efficiency in key bidding processes.”

Unitranche debt is designed more for companies with stable business models – those with a higher level of predictable free cash generation. These can include companies in healthcare, education and consumer staples such as food.

For sponsors considering unitranche debt, it’s crucial to work with a reliable financing partner, according to Bannon. This can help them de-risk their acquisition execution and ensure that the bank and credit fund can work together to get a deal done.

 

HSBC applies strong global precedent and maintains a credible track record as a financing partner because of our experience with debt investors in the European and US markets, and now, increasingly, in the Australian market

Scott Bannon Head of Structured Banking, HSBC Australia

 

ABL – a solution for working capital–intensive enterprises

ABL also offers flexibility and has been used in Australia by corporates and sponsors alike to refinance funding structures. It is designed for working capital–intensive businesses, where the value of the enterprise is most often tied to its inventory and receivables. In the Australian context, ABL solutions can be particularly suited to import and distribution businesses.

ABL can also encourage sponsors to acquire or finance businesses that they wouldn’t normally consider, such as trading firms and product distributors.

HSBC’s expertise and roots in trade financing put it in a strong position to provide well-crafted ABL solutions, according to Bannon. “We’ve done this type of structuring around the world. We have the experience and global expertise, and we can deploy this in Australia for corporate clients,” he says.

 

Scott Bannon

Head of Structured Banking, HSBC Australia

A unitranche wave is coming

Considering the European and US precedents in institutional debt and ABL financing, Bannon believes these solutions will no longer be viewed as alternative products in the next few years. Instead, they will become standard options alongside the likes of traditional bank debt, term loan B and high-yield bonds.

  • “Research shows that more than 50 per cent of all alternative lender deals in the European mid-market space are being done on a unitranche basis,” says Bannon.[1] “This trend is building up in Australia, assuming that global credit funds can maintain the depth of liquidity they currently enjoy.”
  • HSBC expects to support more Australian mid-market sponsors in structuring their funding. It works with mid-market sponsors that typically seek to buy companies worth between $100 million and $1 billion, as well as with larger private equity houses that operate globally.
  • For HSBC, the most effective way to support these sponsors is to find a solution that best fits their financing requirements. The bank also works with sponsors to understand the underlying business profile of the company they’re looking to finance and their growth objectives during the investment period.

“Whatever a sponsor’s situation or a target company’s profile, HSBC has diverse products that can fit a range of business models”

[1] Deloitte, 2018, 'Deloitte Alternative Lender Deal Tracker Summer 2018: Expanding into new markets'. Available at: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/corporate-finance/deloitte-uk-aldt-summer-2018.pdf.

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