(Bloomberg) — Private credit funds are grinding down margins and cranking up leverage to win business over their liquid peers, as trade wars and geopolitical uncertainty suppress corporate deals.
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Credit spreads are among the tightest they’ve ever been for the industry’s best borrowers, with private loans recently pricing as low as 4.5 percentage points over the Secured Overnight Financing Rate in the US, and 4.75 percentage points over Euribor in Europe. Meanwhile, hopes that the Trump administration would bring a renewal in mergers and acquisitions haven’t yet materialized.
“Spreads are in across the board this past year as private credit managers continue to replace bank financing in increasing scale, especially for higher leveraged, larger credits,” Matt Douglass, chief executive of PGIM Private Capital, told Bloomberg News.
Take the financing for Clearlake Capital Group’s purchase of Modernizing Medicine this month. Private credit funds led by Ares Management Corp. agreed to provide $2.2 billion of debt to support the acquisition. The deal priced at 4.75 percentage points over the US benchmark rate, while leverage was between eight and 10 times, people with knowledge of the matter said.
Private credit deals generally offer a premium on spread for illiquidity. But the availability of capital has driven down spreads from peak underwriting times. Average direct lending spreads were as high as 675 basis points over the Secured Overnight Finance Rate in March of 2023, according to a J.P. Morgan report from February. This January, according to J.P. Morgan’s and KBRA DLD’s data, average spreads were 500 basis points over the Secured Overnight Financing Rate.
All options are on the table for private credit lenders. Often, they’re willing to add more leverage, offer payment-in-kind toggles to allow borrowers to defer cash interest payments and accept dividend recapitalizations.
Leverage can stretch to eight times debt-to-earnings, and for some deals, above 10. Terms have loosened, too, with more lenders accepting a lack of maintenance covenants and generous definitions of earnings before interest, taxes, depreciation and amortization.
“Deal flow is improving, but it does, admittedly, remain below normal,” said Bill Sacher, the head of private credit at Adams Street Partners. “There is a supply and demand imbalance and as a result when you are trying not to lose the asset, that creates an elevated level of competition.”
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As spreads have compressed, companies that scored debt in peak-rate markets have been eager to bring down their cost of capital. Up until recently, syndicated loan markets have been wide open, offering cheaper pricing and taking back credits once snatched by private debt players.
Deals for companies including Finastra Group Holdings Ltd., Kaseya Inc. and Avalara Inc. once signaled the strength and permanence of the private credit industry. But these firms are now looking to the banks to refinance their loans in the traded debt markets.
Denise Gibson, UK managing partner at law firm A&O Shearman, told Bloomberg News that an attractive company that’s focused on driving down its cost of debt would take the broadly-syndicated route over the private credit option.
But “with the market uncertainties that we are all facing we are most certainly in a world where sponsors are keeping their trusted private debt funds on speed dial,” she said.
Tariff Impacts
One current reprieve for private credit: the performance of the leveraged-loan market, its key competitor. Several deals have been pulled from the syndicated markets in the US and Europe in recent weeks, as investors have grown concerned about the uncertainty brought about by tariffs.
That unease helped private lenders take pole position in the battle for a €6.25 billion ($6.8 billion) loan for online classifieds company Adevinta ASA. The deal is set to reduce the cost of existing debt and tack on more leverage to help pay a dividend to its private equity owners Blackstone Inc. and Permira.
To clinch the deal, private credit lenders are looking to shave one percentage point off the unitranche loan, for a new price of 4.75 percentage points over the European benchmark rate.
“You would’ve expected there to be a relatively healthy market and sufficient deal flow given the buyside demand and receptive debt markets, but what may have nipped this resumption of deal flow in the bud is the uncertainty created with tariffs, geopolitical risks, etc. — it doesn’t feel like you’re on solid ground at the moment,“ said Adams Street’s Sacher.
With the volatility, broadly syndicated investors are showing they’re pickier about which deals to buy into. But private credit lenders have shown they’re willing to extend debt to companies that banks have passed on financing and ones with lower ratings. In part, that’s because direct lenders face pressure to deploy capital.
“The amount of dry powder that has been raised in the private credit market, and resulting competition for large deals, means that private lenders are reaching in credit quality to avoid spread compression on an absolute basis and relative to the broadly syndicated market,” said Scott Macklin, the head of US leveraged finance at Obra Capital Inc.
Deals
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Ares Management Corp. approached at least two banks in recent weeks to purchase their holdings of debt issued by Hong Kong developer New World Development Co.
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A Singapore operating entity of Australian data center firm Firmus Technologies is seeking a $120 million private loan to fund its capital expenditure
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Blue Owl Capital Inc. agreed to fund as much as $5 billion of personal loans made by online lender SoFi Technologies Inc.
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The direct lending arms of Arcmont and Park Square, as well as bank Sumitomo Mitsui Banking Corp., are providing a debt package for Charterhouse’s purchase of French fire-safety specialist Estya
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HPS Investment Partners provided a $225 million debt package to industrial service provider Team Inc.
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Citigroup Inc. and Apollo Global Management Inc. are offering potential buyers of Boeing Co.’s Jeppesen navigation unit the option to fund the acquisition through the pair’s nascent private credit partnership
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Italy’s Strada dei Parchi SpA borrowed some €300 million of private debt from King Street Capital Management and Farallon Capital Management
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A group of private credit funds has given binding commitments to India’s Shapoorji Pallonji Group, which is raising as much as $3.3 billion in what could be the country’s biggest private credit deal
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Founders of Indian clean energy producer Greenko Energy Holdings have received commitments from at least five lenders as they seek an $800 million private credit loan for a stake purchase in the firm
Fundraising
Job Moves
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Atlas Merchant Capital’s chief investment officer of credit, Ty Wallach, has left the firm
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Fintech firm Iconicchain is hiring Banco Santander SA’s former head of private debt mobilization, Steven Gandy, to steer its planned expansion into the US market
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–With assistance from Rene Ismail.
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