, Catherine Jane O'Rourke July-10-2018 in Banking & Financial Services
Over the past 10 years Ireland has seen a significant change in its debt funding landscape with the emergence of a large number of direct lenders to the Irish market. The term ‘direct lender’ refers to a non-bank creditor lending to a borrower without any intermediaries. The result is that Ireland has developed a more diverse CRE Finance and SME Lending offering which complements traditional bank financing and has led to a range of blended finance solutions for Irish companies.
What has driven this change?
The Irish lending market has been dominated by clearing and lending banks with them traditionally being responsible for over 90% of Irish lending. As such, Irish companies were heavily reliant on these banks as the only source of funding. In the wake of the economic recession, the exit and winding down of a number of financial institutions, Irish companies were left seeking alternative sources of credit.
Despite reports to the contrary, Irish banks are actively lending to trading companies and on property transactions. However, following the recession, underwriting became subject to robust regulated stress testing which now rules out certain borrowers on the basis of their credit history or particular projects due to their loan to value or affordability/repayment capacity profiles.
It became evident that diversification of the lending sources in Ireland was necessary for Irish companies to grow and for this ‘credit gap’ to be filled.
This gap has been partially filled by ‘direct lenders’ and these new entrants are offering finance to companies in both the dry and development property markets and to SME trading entities, thus creating a more varied Irish lending landscape overall.
Current state of play in the Irish market – direct lenders versus traditional banks
Ireland is a small market and traditional bank lending remains strong. The core banks operating in the Irish market are Bank of Ireland, AIB, Ulster Bank and KBC. There are some other banks active in the market but they are focused on leasing and invoice discounting, as opposed to a full clearing and lending offering.
Therefore it is not expected that the market will convert to the US model which is heavily weighted in favour of non-bank debt, nor is it likely to move to the extent that the UK market has towards direct funders in recent times.
In addition to the emergence of direct lenders, we have also seen the expansion of large, originally Irish plcs to the point that they have outgrown the domestic lending market and have moved to global banking providers, which are often made up of syndicated groups of lenders, sometimes including Bank of Ireland Corporate, AIB Corporate and Ulster Bank Corporate. This move by larger corporates to global banking arrangements has opened the gateway for the Irish corporate banking units in Bank of Ireland, AIB and Ulster Bank to focus on mid-market, larger SMEs, smaller plcs and recently domiciled multinationals.
There are also international banks focusing on their global corporate clients’ requirements in Ireland with offices in Dublin such as HSBC, Danske and Barclays (which would also have an Irish property finance unit). Certain of these banks’ operations could expand in Ireland post Brexit.
Who are the direct lenders and what are they doing?
- Mid-Market / SME Finance
At the upper end of the market there are sophisticated participants providing flexible debt capital solutions for SMEs and mid-sized corporates, the leading example being Dunport Capital Management which recently raised €283 million to lend into this sector. Other participants in this space include Bain Capital Credit, Muzinich & Co and BMS Finance.
There is also renewed activity in leasing and invoice discounting finance which is serviced by units in Bank of Ireland and AIB. They can combine this type of funding with their business/commercial or corporate banking products. There are other active participants such as Close Brothers Commercial Finance, Bibby Financial Services, Finance Ireland and Capital Flow which offer leasing and invoice discounting but also lower level SME funding and which compete with the banks in this space.
There are several new alternative credit sources for smaller financing requirements such as crowd funding and peer to peer lending for loans of €5k up to €100k. Participants include GRID Finance and Linked Finance.
- Commercial Investment Property
This is arguably the most competitive sector for direct lenders in the Irish market. A non-exhaustive list of active participants in this space includes Timbercreek Ireland Private Debt DAC, Origin Capital, Cardinal Capital Group, RELM Capital, Finance Ireland, Pepper Money, Profunder, Bolt Capital, and Capital Flow.
- Development Finance
Again the development finance area is one with a number of active participants at various different levels of debt. Prominent participants include Castlehaven Finance, Activate Capital, Beacon Capital, Santiago Capital DAC and Lotus Investment Group.
Conclusion
Direct lenders will never replace traditional banks in the Irish market but we are likely to continue to see more blended finance solutions which will complement and supplement traditional bank lending, creating a more diverse debt landscape in Ireland.
These developments are indicative of a progressive and expanding Irish lending market which is positive for Irish businesses, commercial property and residential development projects.
For further information, please contact Michael Hanley mhanley@hayes-solicitors.ie or Catherine Jane O'Rourke cjorourke@hayes-solicitors.ie at Hayes solicitors.
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About the Author
Catherine Jane O'Rourke
Catherine advises both employers and employees, in relation to contentious and non-contentious employment matters, including contracts of employment, workplace policies, workplace investigations, statutory compliance, redundancies and dismissals. Catherine also has a background in transactional banking, including acquisition finance, property investment finance and development/construction finance.