Unitranche syndication gathers pace in Europe - LSEG LPC

By: Prudence Ho

LONDON, Jan 16 (LPC) – Rare unitranche syndications are picking up in Europe on the back of the growing private debt market, following in the footsteps of the more developed US market and allowing established direct lenders to free up capital, diversify their portfolios and win lucrative fees.

KKR Credit is syndicating a partial of its ￡1.3bn-equivalent underwritten unitranche to support the refinancing exercise of TDR-backed car auctioneer Constellation Automotive, marking the latest example of direct lenders selling their position to other private lenders. The sell down is expected to be completed in the next 2-3 months.

Elsewhere, SMBC, which is a major player in mid-market direct lending, sold a partial €680m credit facility in December to several credit investors after the bank and Park Square Capital underwrote the financing package for Aspen Pumps. The facility was used by the UK-based supplier of condensate removal pumps to refinance debt and back its acquisition of US-based tools manufacturer Malco.

Unlike the US market, unitranche syndications are rarely seen in Europe, where most direct lenders remain focused on originating their deals and holding the paper until maturity.

However, the unitranche syndication market is on the cusp of breaking out, in tandem with the rapid growth of the private credit market in the region. Some smaller lenders that don't have the scale to invest in big tickets or have origination capabilities are increasingly sourcing paper from other bigger and more established private lenders.

"Whether it's overt or quietly done, over the last year, there have been more of these situations where some private credit providers agree to do the whole deal but are taking the view that they can syndicate it to other people," said a leveraged finance banker.

"It's possibly going to become more common as the market develops. There are more parties now, and people can take the view and say, 'Well, this is a good loan, and I can sell it to others.'"

Competitive edge

In some cases, the syndication capability gives a competitive edge to win transactions.

For instance, in a UK take-private transaction where a buyer can only speak to a maximum of six parties outside its advisory team prior to an announcement, a lender with private loan syndication capability could act as an anchor lender to take up all or the majority of the loan to provide certainty to the sponsor buyer. Then, they subsequently sell down a partial position once the buyout is announced.

In August, KKR Credit committed a ￡750m senior loan, taking the most significant portion among four direct lenders in a total of ￡1.75bn unitranche package that backed CVC's take-private bid for the UK's largest retail investment site Hargreaves Lansdown. KKR Credit then sold ￡400m to around 10 other lenders and kept ￡350m in the book.

However, aside from the KKR platform, SMBC and Goldman Sachs, not many market players have direct loan underwriting and syndication capabilities.

"Those people in that crossover like KKR, who obviously have a capital markets function and a direct lending function, could follow that [path]," said the leveraged finance banker.

Goldman Sachs' leveraged finance team have also run some unitranche sell down deals. Alongside KKR Capital Markets and Jefferies, the bank underwrote a €650m unitranche backing Goldman Sachs Asset Management's acquisition of pharmaceutical company Norgine during the market dislocation in 2022. The trio ultimately sold down the loan to several credit funds.

Money spinner

The fees on unitranche syndications can be lucrative.

“The risk-reward for unitranche underwriters is clearly going to be quite high, in particular on more difficult credits. If the syndication goes well, they will skim others on fees and make some good money, however, if unsuccessful, they could get stuck with the name for a long period,” said Floris Hovingh, head of EMEA debt advisory at Perella Weinberg.

In the case of Hargreaves Lansdown, KKR syndicated the deal at the same margin of 550bp over SONIA but at a different OID from initial underwriting. The initial OID was at 98 OID.

Those higher fees come with more risk as there is no pricing flex in a unitranche transaction. That means if the syndication doesn't go well, there is no buffer or cushion to protect the direct lenders, and they are stuck with that sizeable underwriting.

As such, it takes a good judgement on the syndication and underwriters need to be comfortable owning the credit if it can't sell down.

"How do we get comfortable taking the risk? Does that mean we're like absolute cowboys from a risk-taking standpoint? The answer is no," said an executive at a direct lender that provides unitranche syndication. “We just have a better distribution view of who buys it and the price at which they [other funds] buy it."