Private Debt and Private Capital Financing in Singapore and Asia – A Borrower’s Guide
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Private Debt and Private Capital Financing in Singapore and Asia – A Borrower’s Guide

 

I

Private Debt and Private Capital Financiers

There is a group of lenders that specialise in providing private debt and private capital financing to borrowers in Singapore and the rest of Asia. Some setups describe this type of lending as special situations, distressed, illiquid, event-driven, while others brand themselves as private/structured debt lenders or private credit traders. Staffed by veteran investment bankers who are well connected with ultra-high net worth families and corporates across industries, these lenders provide tailored but transitionary capital solutions to non/sub-investment grade borrowers for deal specific purposes.

II

Typical Needs for Private Debt and Private Credit

Requirements for private debt funding are varied but can include:

  • Growth, expansionary or last-mile capital expenditure
  • Buying out minority shareholders for more control over operations
  • Acquisition financing of target assets and/or shares
  • Promoter share-backed financing
  • Dividend recapitalisations
  • Balance sheet restructuring or optimisation
  • Refinancing or extending existing debt

III

Deals that Attract Private Debt and Private Capital Financiers

Highly financeable private debt transactions generally include the following traits:

The borrower assets are cashflow generative and are of good quality

Ideally, the assets need to be operating on a decent scale, have reasonably low unit cash costs, produce highly valued products with good grade/quality, history of reliable operations. It is even better if the assets are of strategic importance to the country where it is located. For instance, private debt lenders like to back potential purchasers of state-mandated privatisations of regulated assets like gas assets or electricity grids. Also, do bear in mind that asset portfolios are generally easier to finance as compared to stranded/standalone assets.

Reliable revenue streams

Private debt financiers like to see assets that have medium to long term contracted revenue e.g. a fixed vessel charter day-rate or a term storage fee rate. A take-or-pay arrangement – where payment is due to the borrower even if its goods or services are not off-taken/consumed by the buyer – would be even more financeable, especially if the buyer is a reputable MNC or government entity. In addition, lenders would be hesitant on financing against revenue streams that move in tandem with market prices as that would expose them to flat price risk or spread risk which is hard to predict and out of their control.

Familiarity with the reputation of the assets and the borrower

It would be ideal if the private debt lenders are already familiar with the assets and key counterparties in the transaction, especially the track record of the borrower. Ultimately, lenders need to be confident in management’s ability to develop and operate the assets, and the borrower’s past track record with other lenders. Lenders also need to get a sense of how much federal and local government support there is for the borrower. Needless to mention, any history of impropriety, bribery or corruption would likely be a deal killer.

Resale/liquidation valuation of underlying assets

Banks and professional valuers should be able to form a reasonably good view of the fair market valuation of the underlying assets. Valuation is important as there is a chance the borrower may not be able to service its debt provided by the lenders, which may trigger enforcement of the security package by the lenders. The lenders would mitigate its losses by selling the assets/shares on the open market or liquidating the assets and inventory. There should also be no question marks regarding the choice of governing law and jurisdiction for enforcement of the security documents.

Medium-term catalyst for asset re-rating

Private debt lenders also assess possible catalysts for the borrower’s assets being valued higher in the foreseeable future. A positive change in investor sentiment for such assets could be due to many factors, including market price changes, privatisations or other forms of industry disruption/consolidation. Private debt lenders consider the existence of medium-term catalysts as critical to their exit, as it indicates a higher chance of their facility being subsequently refinanced by traditional banks or assets being bought out by other investors.

Borrower’s equity participation or skin in the game

Another relevant factor that is considered is the borrower’s equity contribution or “skin in the game” as part of the financing. Lenders typically require borrowers to contribute a proportion of equity as part of the sources of funds to demonstrate commitment towards seeing the deal through. Deals that are expected to be fully financed by senior debt and private mezzanine debt are very challenging to present to investment committees.

Transaction has a set deadline

Private debt financiers like to participate in deals which have deadlines imposed on the borrower e.g. an IPO or a trade sale bidding process. This instils in the borrower a sense of urgency and pressure to close the financing as soon as possible, as compared to bilateral/exclusive deals.

IV

Private Debt Financing Terms

While every private debt lender has different target hurdle rates and deal parameters to adhere to as part of their fund mandates, it is good for borrowers to bear in mind the following features:

Headline cost of funding

As traditional banks would view the default risk to be high and liquidation value to be questionable, the target returns for such deals would be in the “mid-teens” to “low-twenties” i.e. 12-22% cost of finance in addition to upside participation if things go as planned. Be aware of special provisions in interest e.g. make-whole payments, payment-in-kind (PIK) interest features, etc.

Upside participation for the lender

Private debt lenders look for an event which would give them upside participation or an equity kicker if things go well for the borrower post financing. This could be in the form of in-the-money call options on listed shares, pre-IPO shares or production royalties/streaming. We have also seen additional finance charges in the form of prepayment penalties triggered upon premature refinancing of private debt facility.

Minimum ticket size and tenor

Be aware of the fund’s minimum transaction size, and the typical tenor duration. We currently find most appetite in the $20-50 million facility size range, with a minimum tenor of 3 years. Any smaller sizes or shorter tenors would be considered off-strategy for most private debt lenders (with exceptions).

Security package

Typically, we see a combination of hard/real assets e.g. plant & machinery or real estate being the primary security, along with contractual security over receivables, revenue collection accounts and other material contracts. If primary security does not provide sufficient collateral cover, we have seen private lenders take security over unlisted shares. For instance, some lenders are able to advance 30-40% of the valuation of unlisted shares once the pledge is perfected on a charge registry.

We regularly receive queries from borrowers looking for private debt and private capital financing for their projects. Caravel Capital regularly interacts with a broad range of private debt and private capital lenders in Singapore and Asia.

Contact us now to assist with finding the right private debt facility to get your transaction financed.

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