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South African private credit fills gaps left by banks, mid-market offers growth opportunities

A quick glance at South Africa’s corporate lending landscape will show that a handful of banks dominate the field. South Africa’s “big five” banks (Absa, Investec, Nedbank, FirstRand and Standard Bank) have shown resilience throughout the coronavirus pandemic and continue to drive most of the lending activity to businesses and projects.

But in recent years, a number of private direct lending outfits have sprung up to cover the gaps left by banks, offering solutions to some situations that have become too complicated for traditional lenders.

According to Ryan Wood-Collier, CEO of Cape Town-based private credit fund Greenpoint Capital, there are opportunities for non-bank players in the mid-market. He said he believes this type of player is suited to funding more complex situations such as acquisitions, share buybacks, shareholder reorganisations and restructurings.

“These situations often present a tight timeframe, and the requirements cannot be met by a vanilla senior debt structure standalone,” Wood-Collier said. “Private credit funds can also have a competitive advantage in providing certainty on funding [more quickly], with a robust but less bureaucratic investment approval process.”

According to Gavin Jones of Moore Debt Advisory in Johannesburg, banks are great at revolving credit and short-term lending transactions, but they struggle to lend term funding over a duration longer than three years at decent pricing.

“Fund managers can take a longer-term perspective on a lending transaction,” Jones added.

Non-bank lending can also offer tailor-made lending structures, to better suit the needs of the borrower, those polled said.

As with banks, the base investment will always be credit-led, senior or subordinated and typically secured, but the mechanics of non-bank lending, specifically around servicing, repayment, and economics, can vary quite substantially, according to Wood-Collier.

Funds can also take a much more fundamental approach to evaluating the business and credit risk of a borrower, often relying on commercial aspects of the business’s growth trajectory rather than traditional credit metrics, said Roshal Ramdenee, associate partner at Vantage Capital in Cape Town.

“We are thus able to deploy funds within a higher risk appetite than traditional banks,” Ramdenee said. “We often provide funding as the first institutional lender with an explicit undertaking to subordinate our facility to banks and to be ‘bank friendly’ as the business grows.”

In terms of sectors, businesses that are less capital intensive and asset-light offer opportunities for non-bank players, whereas banks are better equipped to lend into mining and heavy industry, according to Wood-Collier.

His fund, Greenpoint, has recently funded TTRO, an online education business, which is asset-light and has significant contract-based revenue, in a deal that was only capable of being funded in a non-bank environment, according to Wood-Collier.

The fund also recently exited an investment into a health-foods business Real Foods Investment, where it initially provided acquisition funding to assist in its growth strategy.

Greenpoint has funded more than 60 such transactions since its inception, having deployed over ZAR 3bn (USD 187m) in the process, Wood-Collier said.

Mezzanine opportunities

While mezzanine lending in South Africa and elsewhere on the African continent is not as developed as it is in Europe or the US, there is also space for this type of lending to complement bank-led transactions.

Vantage Capital is among the few funds providing this type of instrument in Africa. The fund has raised USD 1.4bn since it began operations in 2001, and its mezzanine division has made 33 investments across three funds into 11 African countries. The transactions tend to include a loan component and an “equity-like” component, typically ranging in ticket size from USD 10m to USD 40m.

South African investments constitute 25% to 30% of Vantage’s portfolio, and are denominated in rand, whereas the remaining investments across the continent are made in US dollars or euros. According to Ramdenee, mezzanine lending aims to solve two problems.

“Firstly, providing mezzanine debt in a traditional sense, [plugs] the gap between equity and senior debt provided by banks, where funding is required for growth, capital expenditure or working capital, or to provide shareholder liquidity,” Ramdenee said. “Secondly, our solutions are often viewed as a substitute for equity, given that they are a cheaper source of funding from a dilutionary cost savings perspective, relative to raising equity.”

Last December, Vantage closed a residential real estate transaction in northern Kwa-Zulu Natal for Collins Residential, with a total cheque size of ZAR 430m, of which Vantage underwrote about ZAR 360m. The financing will cover the construction of the development’s bulk services in multiple phases over the next five years.

Away from the mezzanine space, Vantage’s GreenX fund also provides direct lending into renewable energy projects in South Africa, in the form of senior and subordinated debt. It has made 14 senior debt investments into South African solar and wind energy projects across two funds, according to Ramdenee.

Distressed debt opportunities

Non-bank lending, both from local and foreign investment funds, has also been prominent in several recent restructurings and business rescues in South Africa.

Last year, Blantyre Capital and L1 Health lent directly to ailing healthcare provider Ascendis Health, to support its financial and operational restructuring. The investment was subsequently repaid by a ZAR 550m facility arranged by a local consortium in January this year.

Last month, Blantyre Capital and Greenpoint Capital acquired a 100% stake in Ster-Kinekor, a movie theatre operator undergoing business rescue, in exchange for a ZAR 250m senior secured debt facility.

According to Greenpoint’s Wood-Collier, South African credit funds are well placed to provide capital into restructuring or business rescue scenarios. While international funds are certainly not mainstream in these situations, they are looking favourably at certain South African restructurings and need to assess the asset level risk-return against macro-risks, he added.

But there are challenges in funding restructurings in South Africa, that both local and foreign capital face.

“The challenges lie primarily in achieving stakeholder alignment and, particularly in the case of business rescue processes, having committed funding in place to back the rescue plan,” said Wood-Collier. “An added challenge with foreign capital is it introduces FX risk into the equation, which then needs to be managed.”

All in all, whether to bring new money into a restructuring, or finance growth opportunities, non-bank funding in South Africa has room to grow, those polled agreed.

For Moore Debt Advisory’s Jones, there is no doubt that the access to non-bank funding arrangements will grow significantly in the years ahead.

“In many ways, non-bank funders are more suitable to assume the kind of term risk that banks are uncomfortable or unwilling to take,” Jones said.

“This does not make bank funding inappropriate – quite the contrary,” he continued. “It is a case of knowing what transactions to match to which type of funder and then again, being active enough in the market to be aware of what appetite the various funders have for different asset classes at any point in time.”