Since 2018, we have witnessed the middle-market in Spain become more professional in every size segment. Producing more investment opportunities for PE investors from the US, UK, France, and elsewhere.
At the same time, regardless of the generic process strategy implemented (auction, bookbuilding), we have learnt that debt raisings for Spanish assets bear meaningful local dynamics. It is probable that such dynamics will be exacerbated in the short future.
Below are key considerations we now incorporate into financing processes for issuers with underlying Spanish risk.
Relationships and market consensus: Compared to more evolved markets, financing appetite for middle-market deals is more influenced by relationships, establishment, reputation and market consensus – beyond transaction considerations. These shape processes, condition the financing result obtained, and affect capital structure governance decisions over time.
As an example – the relationship web becomes visible when loan agreement negotiations reach portability and transfer lists clauses. And it evolves with dynamics, new entrants, and exits.
Private Credit Asset Manager (TLB/Uni TLB/Credit Opportunities/Other) strategy for the Spanish market: This varies per account and it is dynamic i.e. not static. It includes jurisdiction risk appetite, but also approach to co-lenders, principally banks. The latter includes: (i) excluding them, (ii) accommodating them in ancillary facilities, (iii) pre-placing them carved-out TLA and/or TLB, (iv) effectively making them arrangers by providing TLB liquidity.
Given absence of pocket strategy differentiation by players, asset manager name matters. And their facility economics. Both are read by the market as a signal of counterparty credit quality – to the extent that some banks maintain a fixed tolerance threshold for the economics delta between TLA and TLB and are extremely precise when drafting the MFN wording for accordions.
Leading Underwriting / participating banks: Remain dominant players, particularly across: (i) large cap; (ii) middle-market UW or club; and (iii) low-end of the market segment sub EUR 20m EBITDA. Are cost-competitive and, on occasions, flexible in terms and structure protections – beyond European standards.
Economics, role and/or title pre-eminence between them and versus institutional lenders is a delicate point. Internal approval routes, rating processes and deal management frameworks depend on the way the deal is presented.
Leading commercial banks: remain important for working capital financing: ST Financing, leasing, factoring, confirming, export finance, others. Need to be adequately plugged in the financing structure (pro-rata lines participation, ancillaries, RCF). Usual source of legitimate concern for Management / CFOs in final stages of the debt raising process, or right after closing.
Bank debt structure competitiveness: Bank liquidity generally available up to EUR 300m and provided through (i) cheap (c. 600bps all-in yield including base rate) TLA and, to a lesser extent, (ii) European-priced TLB. TLA competitiveness obtained by extended facility average life of c. 4.5 years including a repayment balloon of 30-50%. This together with effective Cash Sweep holiday generally leads to minimal contractual repayments/cash leakage over the first 24 months of an investment’s life.
Result is a cost-competitive structure showing on the flip side a short refinancing horizon of 30 months max. Which matches the usual counterparty risk step-down derived from Business Plan delivery/deleveraging. Such horizon can be extended to 36 months and further by incorporating low-end priced TLB to the capital structure – and here the smaller the facility the tighter the pricing, given supply-demand dynamics.
No appetite for first-lien FOLO and limited for SS RCF always provided regulatory leverage at closing is not beyond 6x.
Relationship support in credit events (waivers, amendments) can go beyond European standards on occasion.
Market presence, and sector and counterparty knowledge make them prescribers as they are assumed to benefit from information asymmetry – even when not part of a process.
Local Spanish law for loan agreements and precedents: Spanish mercantile law applicable to loan agreements is significantly borrower-protective, with effective acceleration being traditionally restricted to major defaults (payment, misrepresentation). Lenders are more used to exercising soft pressure in default scenarios – freezing available lines being a classic example. Contracts incorporate competitive LMA standards and use of precedent agreements derived from large caps is now extended in our processes.
Local specialized financiers: In some situations, we have utilized niche local financing players as facilitators to reach a given comprehensive debt structure, by providing important marginal gains – in the form of off B/S deleveraging, seasonal financing, other.
Deal Professionals: perhaps more than in other jurisdictions, the output quality of the critical array of services around an acquisition (legal, DD, transaction, agency, other) very much varies depending on the individual professionals chosen, their specialization way of working and standards, beyond corporate brands. It is really a market of personal/individual names and reputations. And in the context of a web of advisors that needs to provide the highest level of delivery also by working harmonically, this is relevant.
Overall process / including credit: Summing up, debt raising processes for Spanish assets are less standard and less administrative than in more mature markets. Less ‘by-the-book’ and more bespoke. Irrespective of target lender universe, local or foreign. They generally require more process control, dedicated supervision, focus intensity, and education.
These points above can be further expanded, as the list itself, beyond our simple summary. They vary depending on the transaction proposed, and over time.
Ultimately, they reflect Spain’s middle-market evolution. And the fact that, for the time being, it is still a small market.