Private debt market needs automated securitisation processes to ease funding pressures

Private debt market needs automated securitisation processes to ease funding pressures

Christoph Gugelmann

By Christoph Gugelmann, CEO of Tradeteq

Creating connections between asset managers and asset sellers in the private debt market has long presented challenges, but with rising interest rates and weakening business activity, banks have cut loan creation and a funding squeeze in non-bank lending is increasingly apparent. For those businesses experiencing funding stress, the automated securitisation and speed of private debt digital marketplaces offers a practical way to help lenders.

During the period through to the start of September, Europe’s private debt industry has raised 26.1 billion euros of new investment, down 34% from the same period in 2022, according to data provider Preqin. Alongside, research from Deloitte shows that direct lenders closed just 111 transactions in the second quarter of 2023, down 48% from a year earlier. It’s clear that all is not well in the world of private debt.

Private debt is the provision of debt finance to companies from funds, rather than banks, bank-led syndicates, or public markets. In more established markets, it is often used to finance buyouts and acquisitions.

The higher interest rates mean that companies need to set aside more money to service their debt. In 2021, provider companies were committing around 23% of EBITDA to debt financing, but this has risen to 36% this year, according to Fidelity. The rise in amount committed reflects the rising borrowing costs as private debt funds charging sizeable premiums – a factor exacerbated by the illiquidity in the market. Yields on European loans in July were at or above 12%, compared to 7% a year earlier.

Fewer funds are available at manageable rates for capital investment and growth, while the prospect of refinancing at higher yields in years to come presents greater challenges. One outcome will be an increase in defaults in the coming year. Fitch Ratings sees a default rate on leveraged loans of 8.5% by the end of 2024, up from 1.7% in July.

Oiling the works

So, what can be done to lubricate the process, reduce financing costs and give borrowers a helping hand?

Firstly, it is important to recognise that the slowdown in fundraising and more cautious capital deployment is to an extent a return to more normal, less exuberant, market conditions rather than a giant step backwards. The reality is that lenders are out there with plenty of cash, but they are being more selective in how they use it.

Secondly, there is the potential for a pickup in activity later in the year if interest rates are thought to have topped and it is possible to readily connect asset managers with asset sellers in the private debt area. Lenders will not want to miss the opportunity to max out on returns as the interest rate cycles starts to turn.

What the market needs is an injection of liquidity, a giant catalyst to make the slow-moving private debt and direct lending processes work faster. This is where Tradeteq’s securitisation as a service technology has a part to play, securitising and distributing such private debt assets. It not only helps asset sellers and investment managers overcome barriers to connecting in this market, it helps to expand the market itself.

The challenge with private debt comes with the cash flows that are not homogenous, which can make them difficult to access. Such assets need to be tradable. That means they need to be converted in recognisable instruments with a CUSIP number or an ISIN.

Tradeteq repackages irregular private debt assets into tradable securities. It streamlines the process through workflow automation, which typically includes extracting assets from the original lenders’ bank offices, matching it with investor criteria, incorporating real-time reporting of such data as net asset value analytics and regulatory filings. The securities are sold in the primary market.

Primary market aids exposure and engagement

The primary issuance marketplace provided by Tradeteq is an interactive space that facilitates exposure and engagement between sellers and investors. As well, there is the provision of very carefully prepared detailed due diligence resources designed to meet the necessary criteria of institutional investors – the objective being to maximise the probability of securing a favourable decision from investment committees.

At the heart of this approach is the idea of creating a process to repackage direct loans into securities that can then be used again and again, meaning that original lenders and new investors do not have to reinvent the wheel each time. It’s a process that includes preparing supporting materials specifically tailored for investor presentations.

The integrated note issuance infrastructure provided by Tradeteq offers asset sellers and investors a synergistic blend of note issuance expertise, automation capabilities, and dynamic investor reporting features. It is a platform that enables bank to increase their net interest income, free up their balance sheets and do more with less.

Meanwhile, for investors looking for new alternative assets that offer low risk and attractive yield, the securitised private debt, issued in the primary market, is an attractive proposition. The technology increases liquidity and helps democratise private debt. That, in turn, empowers investors to focus on delivering investment outcomes and scaling for further investment growth. The end game and bigger picture, of course, is boosting corporate lending and economic recovery.

(1)https://www.reuters.com/business/finance/european-private-loan-market-falters-corporate-credit-stress-mounts-2023-09-07/
(2)https://www.fidelityinternational.com/editorial/article/private-credit-quarterly-outlook-tensions-mount-but-resilience-reigns-80441b-en5/
(3)https://am.pictet/en/us/global-articles/2023/monthly-markets-views/fixed-income/private-debt-timing
(4)https://www.fitchratings.com/research/corporate-finance/us-european-levfin-default-rates-rise-on-tougher-macro-lending-conditions-31-07-2023