Mid-Market Lending: When the Flexible Financing Solution Makes Sense

Mid-Market Lending: When the Flexible Financing Solution Makes Sense

There are many situations that can exceed the normal financial requirements of an SME, and circumstances in which an SME wants an exceptional financing model. Today more than ever, capital providers are required to create novel and special solutions to correspond with the demands of the entrepreneur. Swiss Venture Club's strategic partner, Credit Suisse (Switzerland) AG, founded a wholly-owned subsidiary called "Credit Suisse Entrepreneur Capital Ltd. Risk Capital for SMEs" back in 2010, which has invested approximately CHF 100 million in SMEs and young entrepreneurs. The next step followed at the end of 2016 with the new and flexible financing tool: mid-market lending.

Whether a strategic acquisition or the paying of shareholders is pending, whether you want to pre-finance distribution of dividends as an alternative to company sale, or a company is in a strong growth phase and temporarily absorbing a lot of capital – the situations in question can cause a lot of debt capital to be used and a desire for a flexible financing structure. However, these situations cannot be resolved with traditional bank financing because they exceed lending banks' appetite for risk. In such cases, it can make sense to have financing that allows the use of higher leverage and therefore a flexible amortization profile, as well as having, for the most part, a longer term than a usual bank loan.

Credit Suisse has been offering this type of financing solution under the name of mid-market lending since the start of last year. Mid-market lending is a supplementary offer to the traditional bank financing solution. It primarily backs a company's future cash flow and is aimed at solid, medium-sized Swiss companies with EBITDA between CHF 5 and 50 million. Mid-market lending can underwrite credits of up to CHF 250 million. In order to minimize the risk concentration from the bank's perspective, particularly with larger credit volumes, the bank syndicates a part of credit volume to investors in a manner similar to syndicated loans. Because the intake capacity is limited for this type of loan with traditional syndicate loan participants, mid-market-lending financing works closely with institutional investors who show a high level of interest in this type of investment in the current market environment. Whether syndication is necessary or not – in all cases, Credit Suisse retains a significant credit amount on its own books in order to satisfy the interests of the company, bank, and, if necessary, investors as well as possible.

Of course, this financing solution also carries higher costs due to the higher degree of operational flexibility and the lack of scheduled amortization: The margin depends on a number of factors, including covenants, pro forma leverage, quality of the sponsor, and resilience of the cash flows. In order to offer the most cost-efficient financing solution possible, the credit margin is linked to the level of indebtedness, which means that, with a shrinking level of indebtedness, the margin is also reduced via a standard margin ratchet.

As a result of longer terms and the increased risk profile of the loan, there is an extensive requirement for information on the part of the bank, especially in the initial stages of the credit check process. A basic requirement for bank lending that is as quick and efficient as possible is an accurate basic understanding and a qualitatively sound basis of information on the business model, key markets, stakeholders, products, and business plan. During the repayment term, as a bank for entrepreneurs, Credit Suisse accompanies the SME closely and tracks business development, as is the case with traditional credit.