Neptune Partners takes the temperature of the Nordic loan market
The Nordic corporate loan market has undergone significant changes in recent years. Commercial banks have gradually reduced their loan exposure to small and medium-sized companies, while players such as challenger banks, private debt funds and semi-governmental lenders have established themselves and to some extent filled this financing gap.
Borrowers sometimes choose to seek debt financing from large commercial banks out of habit, existing relationship or uncertainty about the available options. In addition, it is challenging for borrowers to gain a deeper insight into the loan market, its evolution and how different lenders’ preferences vary over time. With the help of Neptune Partners’ expertise in debt advisory and established relationships with hundreds of lenders, companies can gain insights into the best possible loan financing terms for the specific purpose.
During the autumn of 2024, Neptune Partners has, in broad dialogues with various lender categories, gained lenders’ views on trends and how the Nordic market is perceived. This overarching article presents these insights.
What are borrowers demanding today and what options are available?
Key questions for a loan financing are what kind of loan product the borrower needs and whether any particular terms are important. Such factors could be a low interest rate margin, a fast process, bullet repayment (no debt repayment during tenor), financial freedom/flexibility or something else. A clear vision enables a faster loan process with a higher probability of success, as the lender understands early on what is to be achieved.
Different types of lenders have different views and advantages when it comes to the credit structure. Large commercial banks generally have the lowest interest rate margin and often provide a predictable banking relationship over time. However, this comes at the cost of longer loan processes, among other things. A clear trend that these banks are experiencing is an increased demand from borrowers for faster and more transparent loan processes.
If a fast loan process is of great importance, or if the loan financing is not suitable for a commercial bank, faster and more flexible lenders are available in the form of challenger banks and private debt funds. Loans from challenger banks and private debt funds, on the other hand, tend to have higher interest rate margins. For smaller companies, challenger banks are often a good option to fill the gap left by the commercial banks, while private debt funds are primarily suitable for larger companies that want flexible alternatives to bank financing or loans that commercial banks cannot grant for various reasons.
Semi-governmental lenders can provide subsidised loans to companies that cannot obtain loans from commercial banks or other purely commercial lenders. Many smaller companies with strong growth and offerings that contribute to the green transition can benefit greatly from these semi-governmental lenders. In the current market environment, which has been characterised by poor conditions for growth companies to raise capital, semi-governmental lenders have seen an increased demand for loans to cover short-term liquidity needs as well as loans for growth investments to scale up green operations.
A common denominator highlighted by several lenders is that (in the economic climate of recent years) borrowers have requested lower interest rate margins, longer repayment periods and lighter covenants. As benchmark interest rates fall, lenders see a decreasing importance of these aspects, possibly in favour of higher loan-to-value ratios and a general increase in demand for debt financing.
What is the current state of competition in different market segments?
Different types of lenders serve different segments of the loan market, although there is a significant overlap primarily in the larger loan segment. Competition in the market for loans between SEK 5 million and SEK 50 million has been greatly reduced due to the restraint of the commercial banks and the limited number of challenger banks that can offer loans in that size range. Although new entrants see potential in this size segment, the options are still few and often difficult for small businesses to identify on their own. In contrast, for loans under SEK 5 million, there are a number of players that have established themselves in recent years.
For larger companies, there are more options as the commercial banks have not as clearly reduced their lending to them. In addition, competition has increased, primarily from private debt funds, as a number of both Nordic and international players have established themselves on the Swedish market in recent years. Given that private debt funds typically require higher loan amounts than challenger banks, they are particularly relevant for larger companies seeking alternatives to traditional bank financing.
The bond market also competes with private debt funds and commercial banks in the larger loan segment. However, the bond market is dependent on, among other things, fund flows (deposits and withdrawals from funds that invest in bonds) and can therefore periodically be more or less attractive, making the bond market less predictable than the lending from private debt funds and commercial banks. At the moment, the bond market in the Nordics is strong, which means increased competition primarily for private debt funds. A few years ago, the case was the opposite and fluctuations in the bond market will most likely always occur.
The objective of the semi-governmental lenders is not to compete with the private sector, but rather to complement private alternatives or fill the gap left by private actors, i.e. loans primarily to smaller growth companies. The importance of semi-governmental lenders has increased as the commercial banks focus more on lending to financially stable companies, combined with the difficulty for growth companies to raise equity in recent years.
What will characterise the loan market going forward?
Lenders’ outlook on the loan market going forward is positive. A recurring comment is that demand for loans, especially for acquisitions, will increase as interest rates fall. Smaller companies are expected to continue facing challenges in obtaining debt financing, particularly from the commercial banks, and will continue to rely on alternative lenders such as challenger banks and semi-governmental lenders, as well as private debt funds if the loan size is somewhat larger.
Overall, a continued shift away from a loan market dominated by a few large banks is predicted, with challenger banks and private debt funds, among others, expected to continue gaining market share. The total supply of loan capital is expected to continue increasing as more lenders are established and more fund capital is allocated to the loan market.
Which companies will find it easy or difficult to obtain debt financing?
The difficulties faced by smaller companies in obtaining loans on their own are expected to continue. These companies often lack a financial history and a proven business model, are rarely profitable and do not have the resources to keep abreast of the options in the loan market or the capacity to run a broad and structured loan process themselves.
In addition to company size, lenders recognise that different industries will have different possibilities to obtain debt financing going forward. Companies in cyclical industries such as construction, e-commerce, automotive, retail and consumer durables have been seen as riskier for some time, leading to restrictive lending. The cleantech and energy sectors also risk facing challenging times given unpredictable electricity prices and fluctuating profitability. Companies that are considered to have relatively easier access to debt financing are non-cyclical companies and companies with recurring or predictable revenues operating in sectors such as food, software and healthcare, as well as companies in industries with structural growth such as infrastructure and sustainability.
How will lenders act in the market going forward?
All groups of lenders generally see favourable conditions for strong future growth. The commercial banks want to grow but emphasise that this should be done with caution and with reasonable risk. Many players in the lending market note that commercial banks are withdrawing from the segment for small and medium-sized companies and that the growth ambitions of the commercial banks are primarily aimed at medium-sized to large companies.
Most challenger banks have recognised this and have grown their loan books significantly in recent years. Despite high historical growth, several challenger banks today have an objective to continue to grow in the segment and to increase the loan size to reach companies that are currently between the preferred loan amounts of the challenger banks and the commercial banks.
The semi-governmental lenders also see a need to grow when lending opportunities for smaller companies are limited. These players are often overlooked in a loan financing. Finally, there are a number of private debt funds, both Nordic and international, that intend to grow in the Nordic region but where growth may potentially be constrained by a continued strong bond market and the historical power of the commercial banks in the larger size segment. The establishment of private debt funds in the Nordic region has been a strong trend in recent years and is expected to continue.
Concluding remarks from Neptune Partners
Neptune Partners shares the lenders’ conclusions above. It is a fact that the commercial banks have reduced their risk exposure to small and medium-sized companies and that there are more challenger banks and private debt funds with representation in Sweden today than a few years ago.
We believe that the loan market will continue to increase in complexity in terms of possible loan structures and loan purposes. Several of today’s challenger banks started their journey with factoring solutions and standardised smaller loans and today several of these challenger banks have the competence, the willingness and a sufficiently large loan book to be able to offer, among other things, relatively large bespoke loan solutions.
The need for debt advisory is likely to increase as the loan market becomes more complex and the number of lenders increases. The need for debt advisory will increase both for smaller companies that need to secure their first loan financing and for private equity companies that want loan structures that the commercial banks cannot offer or that commercial banks can only offer a few major private equity companies. Neptune Partners as both a financial and legal debt advisor exists as part of this development, and we are always available to share our insights!
