(Bloomberg) -- Banks are capitalizing on lower interest rates to claw back corporate debt deals from private credit funds, staging a major comeback after losing market share in recent years.
Almost $30 billion of private debt has been refinanced through broadly syndicated loans across more than 70 deals so far this year, according to Bank of America Corp. research, as more borrowers look to slash interest costs.
Banks and private credit lenders have been in tense competition to provide financing for what’s been a thin pipeline of mergers and acquisitions. Expectations for interest rate cuts have helped the broadly syndicated loan market come roaring back as borrowers seek to cut interest expense.
“The syndicated market has been on fire and taking more market share,” said Andrew Bellis, head of private debt at Partners Group. “That market is wide open and banks are aggressively taking on underwriting.”
In recent weeks, K2 Insurance Services, Circor International Inc. and Alegeus Technologies, have all bid farewell to their private credit lenders for broadly syndicated debt to cut costs. Circor’s new leveraged loan could cut the company’s interest rate margin by about 2.25 percentage points, Bloomberg reported.
The savings are significant for borrowers that had high-cost loans. In the case of Vista Equity Partners’ Alegeus, the private loan used to acquire the business had a hefty margin of 8.25 percentage points over the Secured Overnight Financing Rate. The company sought pricing of 5 to 5.25 percentage points over the benchmark in its broadly syndicated deal launched last month, which was offered at a discounted price of 98 cents. That would equate to $75 million in interest savings over the life of the five-year loan, according to Bloomberg calculations.
“There’s a limit to how tight of a spread middle-market direct lenders can participate in,” said Clay Montgomery, a vice president in the private credit group of Moody’s Ratings, who argued low-spread deals make it more difficult for private credit funds to meet their return-on-equity targets. “We’ve seen high 400s but beyond that, the direct lender is going to struggle to put a tighter spread into their book and make the ROE math work.”
Veritas Capital-backed energy consulting firm Wood Mackenzie Ltd. also swapped out private debt in the public markets earlier this year, refinancing unitranche debt led by HPS Investment Partners in January and netting $37 million a year in savings over the life of the new seven-year loan, Bloomberg reported.
The shift comes at time when the private credit market is under considerable pressure to deploy capital. Lenders that have raised record amounts of cash have struggled to invest it amid a muted market for leveraged buyouts. Private credit dry powder, the amount of money committed to funds that has yet to be deployed, reached an all-time high earlier this year.
“A big pick up in M&A activity will take time,” Bellis said. “We’ve been busier with refinancing, repricing, add on activity but I don’t think there will be a flood of M&A all of the sudden.”
Private credit managers are still staying busy. And to be sure, some deals are going in the opposite direction, getting financed out of broadly syndicated loans and into the hands of private debt funds.
Bill Eckmann, head of principal finance for the Americas at Macquarie Group Ltd., said the firm has been expanding his team in order to take full advantage of the rise in private credit opportunities.
“There are still a number of credits that aren’t a good fit for debt capital markets,” Eckmann said. “It can be cumbersome for acquisitive companies to keep getting ratings – it’s harder to do portability, payment in kind and delayed draw term loans,” he said, referring to features that are often found in private credit deals.
Competition for smaller transactions may not be as severe. But if the Federal Reserve continues its rate-cutting cycle, direct lenders may be forced to make more concessions to borrowers in order to retain their business.
“The core middle market isn’t losing a lot of deals,” Montgomery at Moody’s said. “But at the larger end, they’ll feel more pressure because the syndicated market is their true competitor.”
Deals
- K2 Insurance Services is seeking to cut borrowing costs by swapping private debt that helped fund the firm’s buyout with a new $500 million leveraged loan
- Private credit firms have held discussions to provide a new $625 million term loan and a $100 million revolver to home security system company Brinks Home to refinance the company’s debt
- Mizuho Financial Group Inc. bought a minority stake in Golub Capital, as it seeks to take advantage of the growing private credit markets in the US
- Blackstone Inc. provided a $550 million private credit deal for Graham Partners Inc.’s Gatekeeper Systems, which makes technology for shopping carts designed to detect theft
- Several private credit funds are working on plans to finance a potential buyout of Five Arrows-owned Softway Medical SA
- Antares Capital and KKR Capital Markets are providing a $850 million private club debt financing to support Kohlberg & Co.’s majority investment in Clearesult
Fundraising
- BlackRock Inc. is hunting for Indian direct lending opportunities in a broadening array of sectors from agriculture to hospitality as the nation’s booming private credit market lures more borrowers
- UK investment firm Coller Capital is building a secondaries fund to allow retail investors to snap up stakes in private credit funds from other players who sell out early
- Asset manager Ninety One, which provides private credit financings to European mid-market companies, has held a final close for its European Credit Opportunities Fund 1 on €150 million
- Malaysia’s state-linked funds are increasing allocations into domestic private markets to boost the growth of local companies
Job Moves
- Macquarie Group Ltd.’s asset management arm has hired Brian Van Elslander as head of direct lending and portfolio manager for the Americas and named Sophia Alison head of direct lending for Europe, the Middle East and Africa
- Carlyle Group Inc. managing director Matt Settle has left the firm to start his own fund
- Axis Asset Management Co. in India hired Nachiket Naik to head its private credit business
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