We sat down with Jonathan Saltzman, Managing Partner, Torque Capital Group, to discuss Why Alternative Debt Options Are Gaining Ground Over Commercial Banks in Today’s High Interest Rate Environment and more. Read on for insights on these topics and more.

Q. How attractive do commercial banks look compared to alternative debt options in today's market?

In today’s high interest rate environment, commercial bank offerings have become less attractive compared to alternative debt options. One of the main reasons for this shift is that commercial bank rates are directly tied to the Secured Overnight Financing Rate (SOFR), which fluctuates with market conditions. Direct lender rates, on the other hand, are not tied to SOFR. Since direct lenders have traditionally aimed for returns in the low- to mid-teens, the gap between their rates and those of commercial banks has narrowed, making alternative lenders more competitive.

When choosing a lender, it's essential to consider more than just the interest rates. We prioritize lenders who offer flexibility, accommodation, and tailored solutions to meet the specific needs of our portfolio companies. For example, some of our portfolio companies, such as asset-intensive auto parts manufacturers, experience seasonality and cyclicality. These companies require lenders who can support them through these fluctuations.

We also often use a “buy and build” strategy, involving significant M&A activities. This strategy requires lenders who understand and support growth initiatives and can provide lending structures that accommodate our ambitions.

Q. Which are the best sources of alternative debt for independent sponsors today, and what are the key considerations for independent sponsors when taking alternative financing?

Alternative financing options for independent sponsors today include direct lenders, mezzanine and unitranche lenders, and asset-based financing such as ABLs, accounts receivable factoring, and equipment finance. We have also successfully employed sale-leaseback transactions to generate liquidity from real estate assets. We've observed that sellers of businesses are becoming more open to financing sale transactions through seller notes, earn-outs, and increasing proportions of rollover equity.

Q. What are your top tips for anyone negotiating financing terms in today's tight credit market?

In today’s tight credit market, it’s crucial to focus less on the financial terms—such as rates, fees, and overall economics—assuming they are in line with the market, and more on the financial flexibility offered by the lender. Flexibility is far more valuable than saving a few basis points when your company inevitably faces challenges and opportunities. A lender who can adapt and work with you through tough times will be an invaluable partner.

Q. Why will you be speaking at iGlobal Forum's Independent Sponsors Summit in NYC on September 17-18?

I’m excited to speak at the iGlobal Forum’s Independent Sponsors Summit because I believe in the value that independent sponsors bring as great buyers, owners, and stewards of businesses. With 15 years of experience as an independent sponsor, I have a lot to share—especially my failures, which are often more interesting and educational than my successes. 

Jonathan will join a panel discussion on ‘Securing The Best Debt Financing Options With The Most Favorable Terms In A Tight Credit Market’ at the 17th Independent Sponsors Summit in New York this September. They’ll examine topics like Commercial banks vs. alternative debt - evaluating the best source of debt financing for your deals, Securing cost-effective capital while maintaining structural flexibility, How and why you may leverage sale-leaseback as a covenant-free, non-dilutive debt-equity substitute, and more. Jonathan will be joined on the panel by Azhar Quader (Queens Court Capital Management), Liddy Karter (Mizzen Capital), Robert Puopolo (Epic Partners), Judd Kohn (White Wolf Private Credit) and the panel will be moderated by Peter Shelton (Benesch Law).  Register now to join us this September at the Independent Sponsors Summit.