Following the trend that has been seen in the US and Europe over the past few years, the landscape for debt financing of PE deals in Australia has recently evolved from being a bank-dominated market to being dominated by non-bank lenders. Among those non-bank lenders operating in the Australian market are global names such as Barings (formerly Babson), ICG, KKR Credit, Partners Group and Bain Capital (formerly Sankaty), together with local debt funds, such as Metrics Credit Partners and Challenger. Another recent development has seen local pension (or "superannuation") funds lending directly into transactions.

The increased liquidity resulting from the growth of non-bank lenders, combined with their flexibility on documentation, a supply/demand imbalance favouring borrowers, and global PE firms and their legal and financial advisers seeking terms which they have become accustomed to in other markets, has meant that the Australian market has started to adopt those terms which have effectively migrated across from the US and Europe. Among those terms are "covenant-lite" Term Loan B structures, which have become a viable option for larger Australian deals. The financing for Apollo and CIMIC's joint venture vehicle, Ventia, included the first ever Australian-denominated Term Loan B facility which was up-sized from an initial target of A$250 million to A$359 million. This was a seven year "covenant-lite" deal which was priced at 5.50 per cent. above BBSY (the Australian equivalent of LIBOR/EURIBOR), and was funded primarily by private debt funds and superannuation funds. It has since taken advantage of favourable market conditions to re-price down.

A further example is the facility for Iron Mountain's acquisition of Recall Australia, which was the first ever Term Loan B facility to be both Australian-denominated and Australian law governed. Hogan Lovells advised ICG on its participation in the A$250 million facility as part of a lending syndicate which included a number of Australian superannuation funds. The deal structure included a synthetic collateral allocation mechanism which provides for a pro-rata sharing of enforcement proceeds between the Australian TLB lenders and Iron Mountain's US senior facility lenders.

These developments mean sponsors and other corporates are now able to access a TLB market without having to incur the cost of expensive AUS – USD cross-currency swaps. We anticipate that this may become the new financing solution of choice for many, particularly when compared with the quarterly maintenance covenant regime typically imposed by the traditional Australian bank debt market.