Ifrlpc shadow banks taking market share in us loan market

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Oct 16 Shadow banks are winning market share from US banks in the US leveraged loan and high yield bond markets as stricter regulation forces borrowers to cast the net wider to finance buyouts. Jefferies is the most high profile non-bank lender that private equity firms are turning to as heavyweight arranging banks shy away from loans that could incur penalties if deemed to breach leveraged lending guidelines. The firm recently underwrote the $4.3 billion buyout of business software maker Tibco Software Inc by Vista Equity Partners. It teamed up with two private equity lenders and just one bank - JP Morgan - that was willing to do the deal. Jefferies is also financing Vista's $1.5 billion acquisition of payment processing company TransFirst Inc with Nomura, Guggenheim Partners LLC and Apollo, sources said. Regulators are taking a tougher line on enforcing the guidelines, which were first announced in March 2013, to prevent risk building up in underwriting banks which regulators are ultimately responsible for as lenders of last resort. The guidelines view leverage over six times as problematic and also focus on a borrower's ability to pay off debt within a specific time frame. Jefferies is not a commercial bank and was not bailed out in the aftermath of the financial crisis. As a result, the guidelines do not apply to Jefferies or other firms that are well positioned to benefit from banks' pulling back."Our increasing success over the last ten years has come from sticking to our knitting and operating consistently with the same risk and business principles," said Richard B. Handler, chairman and CEO of Jefferies."Our track record of financing quality equity sponsors and companies with appropriate leverage and syndicating their credit successfully speaks for itself,"RISING TENSION

The Federal Reserve's rebuke of Credit Suisse in the summer for failing to adhere to the guidelines was a big wake-up call for Wall Street banks."The shadow banking sector stepping in is definitely the hot topic, and certain unregulated institutions in particular have been more active," said David Morse, a partner at Otterbourg. JP Morgan's CEO Jamie Dimon warned against the shadow banking sector on October 10, which he described as 'huge' and 'growing' and said poses a danger 'because no-one is paying attention to it'. Market players say that it could take at least another six months to see if non-bank lenders will become bigger players, but private equity firms are already taking note. Non-bank lenders are able to put more leverage on buyout loans. This can reduce the equity cheques that private equity sponsors need to write, which boosts their profit.

Vista turned to Jefferies when it bought Tibco after seeing the competitive debt package that Jefferies had put together for rival bidder Thoma Bravo. Tibco's debt package of around $2.9 billion includes loans and high-yield bonds and is about $200-400 million bigger than Vista's original arranging banks could provide, sources said. This trend is expected to continue. Private equity firms are increasingly able to share risk and co-underwrite loans with commitments of up to $200 million, primarily as buyers of the debt and direct investors. KKR, which underwrites its own buyouts alongside banks, participated in Tibco via Merchant Capital Solutions, a capital markets business that it created with the Canada Pension Plan Investment Board and Stone Point Capital. Apollo, and Ares through its partnership with GE, also stand to gain, while GSO, part of the Blackstone group, is an increasingly large player. Frustrated by banks' increasing unpredictability, private equity firms are also considering distributing debt themselves.

"If you want four banks to underwrite a $1 billion deal, you have to talk to eight. It's unpredictable and difficult," a US private equity sponsor said."Do we need to distribute directly ourselves? We have our own relationships," he added. SLOW CREEP A wide range of non-bank lenders, including banking and financial services group Macquarie, Business Development Companies (BDCs), insurance companies and hedge funds could also become more active in financing buyouts. These lenders could group together to finance deals that banks would not otherwise be able to do, or partner with banks to shoulder risk that helps deals to fit the guidelines. Although change is afoot, it is expected to be gradual. Non-bank lenders will struggle to compete with arranging banks' massive balance sheets, distribution capabilities and ability to support deals in the secondary market. Jefferies has a small but growing share of the $728 billion of US leveraged loans sold this year, and has moved up to 14th place in LPC's league tables in the same time from 22 in 2013. The firm sold a $425 million high-yield bond last week to further bolster the capital base of its lending arm. Competing with the firepower of big banks will still be difficult when fees are sufficiently tempting, as JP Morgan showed on the Tibco deal. Banks are able to do a couple of 'criticised' loans a year for a big enough incentive. Many believe that the greatest opportunity for non-bank lenders lies in the middle market, where fees are lower and lenders do not have to provide liquidity.