Basel III was introduced which required banks to maintain appropriate leverage ratios, sufficient levels of reserve capital and introduce countercyclical measures. These requirements are assessed on an annual basis and revised to minimise the risk of system-wide shocks and prevent future economic collapses.
What did this mean for borrowers? Loans were more difficult to secure, requirements on collateral became stricter and other terms and conditions became more restrictive.
Hit from all sides
In addition, most commercial banks across the Gulf have rationalized their balance-sheets to focus on assets deemed safer based on the sector, business model and the maturity stage. As such, there has been an increase in lending to government/government-related entities and large-cap corporates, thus reinforcing the challenge of accessing finance from banks for many small, medium and mid-cap businesses.
Developers left with little
The bond way
Specialist advisors and investment banks assist companies in issuing bonds, but it is a long process and is subject to investor demand at the time of issuance.
What is stopping businesses from taking advantage of such attractions? Misperceptions remain, with many business owners mistakenly viewing it as more expensive. And many view it as riskier and only for ‘bad credit’.
In fact, alternative finance providers are typically well-established financial institutions with the ability to quickly assess an opportunity, consider individual requirements of borrowers, and provide a bespoke solution that gives borrowers the flexibility they need while still protecting the interests of the lender.
These advantages enable businesses to access capital often far more quickly than via traditional methods and without some of the restrictive requirements, including tailored covenants and non-amortizing structures.
A deal which Shuaa completed in Dubai’s hospitality sector is a case in point. With a project already 85 per cent complete, the developer needed further funding – which the senior lender was unwilling to provide.
Getting a project to ready status
Due to leverage covenants, the developer was unable to raise debt from other sources, and because the asset was under construction the developer was unable to raise equity at an acceptable valuation. Shuaa was able to fulfil the complex requirements of the transaction through a preferred equity instrument, with a minimum return payable at maturity, thus allowing the project to complete without any impact on their existing bank facilities and no dilution for shareholders.
The hotel commenced operations shortly after our investment, and the owners were able to refinance the entire capital structure, repaid the existing debt, redeemed the preferred equity and released some cash to the shareholders.
So, businesses can find that alternative finance in fact represents an ideal funding instrument: quick and more flexible than bank debt without the complications of issuing a bond. Meanwhile, for investors, it offers the potential to participate in interesting business opportunities at a lower point on the risk curve than equity with attractive returns.
All of which makes the “alternative” a viable and appealing option. As the youngest and now third largest asset class in the private capital universe, global private debt assets under management (AUM) have consistently grown and expected to reach 41 trillion by 2021. The alternative is playing an increasingly important role on the global stage to cater to an ever changing environment.
The expectation is that the trend will continue, particularly in markets such as the GCC.
– Natasha Hannoun is Head of Investment Solutions at Shuaa Capital.