Traditionally most UK corporate lending was provided by banks. Indeed, the early Loan Market Association (LMA) templates were drafted on the assumption that lenders were banks or financial institutions. Non-bank investors began to emerge as lenders around the time of the millennium, with a gradual increase in the number of institutional investors and debt funds seen over the next two decades.
Part of this trend has been the increased role of debt funds either replacing, or lending alongside, traditional bank lenders. From a borrower's perspective, a debt fund can represent an attractive funding partner. Such funds will be less constrained by regulatory capital requirements, when compared with a bank. A debt fund may be more flexible in its approach and willing to deploy capital against certain types of credit risk, if the price is right. They may also be able to act very quickly, with speed of execution being a key feature required by borrowers on competitive auction processes in particular.
However, a debt fund will have very different sources of funding when compared with a bank. A fund is essentially an investment vehicle for a (potentially very wide) pool of underlying investors (limited partners). Hence, ultimately, the fund's ability to advance cash is dependent on the liquidity and creditworthiness of a pool of entities. To mitigate this, a fund may have a liquidity facility of its own, in order to guard against capital calls which are not promptly met. However, suffice it to say that the cashflows required to honour a bank's lending commitment are likely to be very different to that of a debt fund.
In the same way, the circumstances in which a bank may not fund (either because it can't or because it chooses not to) are typically very different to those applicable to a debt fund. A bank, for regulatory, reputational and other reasons, is extremely unlikely to choose not to fund if it is contractually required to do so under a committed facility. Equally, the circumstances in which it cannot fund are likely to be very limited and indicative of significant macro financial and economic pressures, which may of course lead to the relevant bank receiving governmental or other third-party support that may not be available to a debt fund.
As we have noted above, a debt fund is reliant on different funding sources to that of banks and typically it is those investors which will determine whether it funds – if they fund it, it is very unlikely that it would not pass on the funds to its borrower, but the question then becomes whether they will fund. Again, the reputational impact would be considerable if an investor – particularly an institutional one – were to fail to fund, but there may be other factors involved, including the investor's concern over the performance and management of the fund itself, the market in which the borrower operates and, of course, its own ability to fund.