AUSTRALIA Trends and Developments Contributed by: Alastair Gourlay, Lewis Grimm, Emily Tsoi and Thanasis Dogoritis, Jones Day
Overview Private credit is an alternative asset class which has seen tremendous growth in Australia in recent years. This growth has been fuelled by a number of geopolitical and economic factors, including regulatory reforms introducing stricter capital requirements on banks, a surge in private equity activity in the leverage buyout market and the evolving needs of borrowers in a compara - tively high interest-rate environment. Private credit is reshaping the Australian lend - ing landscape, and is expected to continue experiencing sustained growth, as borrowers increasingly turn to private credit for availability of capital, emphasis on speed of execution and flexibility compared to the broadly syndicated loan market. When private credit first entered Australia around two decades ago, only a handful of opportunistic private credit funds were active in the market. It has since grown to include a full range of private credit asset classes, including direct lending, structured and asset finance, real estate debt, infrastructure debt and opportunistic credit. While the secondary loan market in Australia is relatively illiquid compared to the US and Europe, Australia’s creditor-friendly enforce - ment framework provides strong protection and certainty to investors and lenders alike, making Australia one of Asia Pacific’s most active and popular private credit markets. Loan Structure Direct lending involves secured bilateral loans made by non-bank lenders to companies with - out an intermediary (such as an investment bank), and are typically not publicly traded, as opposed to broadly syndicated loans (BSLs)
which are usually traded through a traditional syndication process. As compared to BSLs, private credit loans are usually “buy and hold” assets which are not typically intended to be traded, and will be held to maturity by the original private credit lender. This incentivises private credit lenders to retain a degree of financial covenants in their loan documents, especially for mid-market compa - nies, in order to monitor and intervene early on to safeguard their investments. Historically, pri - vate credit direct lending focused on mid-market companies to fill in the gap for the lack of loan supply from banks due to tightening market conditions and macroeconomic factors. How - ever, market dynamics are constantly shifting, creating far more opportunities for private credit lenders to lend to top-tier creditworthy borrow - ers. Combined with the greater divergence in private credit asset class and growing compe - tition, there is a shift for documentation in the private credit sector to start mirroring the loans in the syndicated loan market, characterised by a greater presence of cov-lite or cov-loose loan structures, with an increasing acceptance of competitive terms, such as Payment-in-kind (PIK) interest, providing incremental debt and portability features. Unitranche and TLBs Unitranche loans are now highly prevalent structure in the Australian direct lending sec - tor – being a hybrid loan which combines senior and subordinated debt and documented under a single loan agreement, with the relationship between the senior and subordinated lenders being set out in a separate intercreditor agree - ment. Instead of having separate loans with dif - ferent interest rates and repayment terms, the borrower typically receives one streamlined loan with a consolidated interest rate. The vast
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