What’s the Current State of Credit Funds in Canada?
To learn about the pandemic’s impact on Canadian credit funds, we speak with Geoffrey Hiscock - Senior Vice President of Originations for FrontWell Capital Partners Inc.
FrontWell is a private credit fund focused on providing transitionary senior debt financing to middle-market companies in the United States and Canada. In his role, Geoff is responsible for sourcing senior secured debt transactions with financing needs ranging between $5MM – $50MM, whilst working in conjunction with the prospective client and the company’s experienced underwriting and portfolio team to structure and deliver the optimal senior debt capital solution.
FrontWell differentiates itself by providing creative bespoke senior debt capital solutions, in the forms of revolving and term lines of credit to middle-market companies that may be distressed, are in high growth situations, require recapitalisations, are engaged in M&A activity and require the necessary transitional capital, outside of traditional sources of senior debt, in order to properly capitalise the business for growth and transitionary purposes so that the business can transition to more traditional financing (i.e. bank or bank ABL).
How has the pandemic affected private credit funds in Canada?
The COVID-19 pandemic, which has quickly morphed into a global humanitarian crisis and economic disaster, has added a new layer of complexity. And while the supportive subsidy programs initiated by the Canadian Federal Government have enabled companies to continue to operate, these subsidies will soon come to an end and will no longer provide a band-aid to troubled companies, particularly lower-middle market companies.
During COVID transactional flow has remained strong in Canada, however, we are not seeing as many financing opportunities that intersect with our approach to credit structuring as a substantial percentage of non-essential distressed lower to middle-market companies are currently being supported through government subsidies and, perhaps reluctantly, traditional lenders.
As such, Canadian private credit funds have been proactive in preparing for, what is believed to be, a tremendous amount of future deal flow as these companies prepare for the government financial assistance to end in the near term and are already beginning to assess their capital needs in order to identify potential liquidity and liability mismatches and are seeking to bridge the gaps – especially as the traditional covenant governed credit facilities provided by the traditional banks continue to proactively assess the credit quality and future of these companies following the elimination of government financial assistance.
FrontWell is in an ideal position, with its experienced team of asset-based and corporate banking professionals, to expeditiously and strategically assist these companies with their capital needs as the traditional sources of financing (i.e. banks) prepare to exit their credit facilities with these lower-middle market companies.
Canadian private credit funds have been proactive in preparing for, what is believed to be, a tremendous amount of future deal flow as these companies prepare for the government financial assistance to end in the near term and are already beginning to assess their capital needs in order to identify potential liquidity and liability mismatches and are seeking to bridge the gaps – especially as the traditional covenant governed credit facilities provided by the traditional banks continue to proactively assess the credit quality and future of these companies following the elimination of government financial assistance.
Have you noticed an increase in Canadian and US middle-market companies’ needs for loans over the past year and a half?
We have noticed an increase in Canadian and US middle-market companies’ needs for loans over the trailing 18 months – however, a larger portion of the transactions that we have observed US$1B+ are in non-essential industries, during this unfortunate lengthy pandemic, such as income-producing realty (i.e. hotels, shopping plazas etc.) which experienced an enormous decline in revenue. Furthermore, we have observed $500MM+ of Oil and Gas and Mining (i.e. coal) companies that, even absent a pandemic, are highly cyclical and subject to global commodity risk, which have been further impaired during the pandemic and are seeking rescue capital in the form of equity, mezzanine capital – given that they are term heavy transactions with minimal utilisation – which leads to prolonged cash burn.
We are also observing similar subsidies and financial support from the US Government with small and medium enterprises which has provided US banks (similar to the Canadian banks) with some breathing room. This support, which shall run its course shortly, has made some of these SMEs, in need of alternative financing, reactive to the situation when they should be proactively preparing themselves to be transferred into special/distressed account management with the banks.
Having said that, we have been fortunate to secure and assist a number of companies that took the proactive approach of seeking alternative financing prior to the conclusion of the government subsidies.
How have you, at FrontWell Capital Partners, reacted to this?
At FrontWell, we are not reactive, rather we are proactive. We anticipated the economic issues and we fully understood the negative economic impact on lower-middle market companies.
We are generalists, as such, we immediately proactively set out to commence direct calling into the US and Canadian traditional industries, banks, alternative financiers (seeking “club” on transactions, active restructuring groups in the large accounting firms as well as the specialty restructuring advisory firms, that we support, where we can clearly identify “cracks in the façade” and propose creative debt capital solutions thus alleviating the predictable issues that they may face with their traditional sources of finance (i.e. anticipated defaults; being pushed into special/distressed account management) which allows these businesses to avoid the associated default and monitoring fees imposed upon them.
What would you say are the benefits of financing solutions that go beyond traditional sources of capital?
FrontWell is a relationship-driven lender providing flexible “stretch” committed senior secured credit facilities that rely on adaptative and knowledgeable management, well-established operations and adequate asset coverage. We do not rely on financial covenants.
FrontWell provides transitionary debt capital solutions, and as such, we seek to provide a clear path for companies to transition from point A to point B, absent leverage covenants and tenuous debt service coverage covenants – we are providing patient capital in structures such that the company does not need to continually worry that they are going to be tripping covenants – peace of mind – so that the leaders of the company can focus on achieving their objectives so that they may return to traditional financing. And in some cases, such companies remain with FrontWell given our friendly, professional, and experienced approach to working with the companies to achieve such objectives. Our team which has over 150+ years of North American asset-based and large institutional corporate lending experience with an expansive network of professional relationships also allows us to provide companies with a myriad of services.
What do you think the future holds for your industry?
The sky is the limit. In creditor friendly markets, by way of taking security against debt, such as the US and Canada, alternative credit shall continue to grow at an exponential pace, and we are already beginning to see a substantial increase in our pipeline for businesses seeking alternative debt capital solutions as they are fast approaching the near term maturity of the government subsidies.
There is always going to be a space for creative “stretch” senior secured debt capital solutions and FrontWell is in an incredible position to deliver the first-in-class service to prospective clients.