(Bloomberg) — Yesterday they dealt in distressed debt, today they’re battling to establish credibility as plain-vanilla lenders.
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Money managers once known for providing capital to businesses that couldn’t get bank financing are vying to lend to the world’s top-rated companies.
Blackstone Inc. has more than $90 billion of investment-grade private credit assets, up roughly 40% from a year ago. The firm expects that to grow.
Apollo Global Management Inc. is also putting more resources into writing bigger checks to finance investment-grade companies. In the past four years, it originated about $100 billion through its “high grade capital solutions” business that offers bespoke types of financing for higher interest than public debt.
In the past, private credit typically involved money managers lending to rivals’ portfolio companies that couldn’t readily tap public bond and loan markets. They were financing buyouts and dealing with businesses that were smaller and too leveraged for banks to touch.
Those same alternative asset firms are focusing on bigger, sturdier businesses — and their reserves of equipment, property and other collateral. These aspirations put firms such as Blackstone and Apollo more squarely into banks’ terrain, advancing money managers’ efforts to grab dollars and clout from Wall Street.
But rather than using depositors’ cash for financing, asset managers are turning to insurers drawn to the allure of extra yield from private markets. Insurers have vast sources of permanent capital they want to park in investment-grade-rated assets, and alternative asset managers can expand their own businesses by meeting this need.
Continued Evolution
The insurers’ thirst for investments puts more focus on how those assets are rated.
In the past few years, Kroll Bond Rating Agency has rated as investment-grade $20 billion of debt secured by cash flow from corporate assets. Those numbers speak to the rise of nonbanks that can do these kinds of highly negotiated deals with borrowers.
“It’s an important step in the continued evolution of the capital markets,” said Bill Cox, KBRA’s global head of corporate, financial and government ratings.
In the first nine months of 2024, Blackstone originated or placed $38 billion of financings — with a blended A-rating — for private investment-grade-focused clients. That’s up 70% from a year ago. Insurers often need assets to be rated at least single A.
“We’re seeing a dramatic increase in demand for all forms of investment-grade private credit,” Blackstone President Jon Gray told analysts last week.
The firm has four key tie-ups with insurers, and assets managed for insurers in the third quarter rose 24% year over year to $221 billion. Gray has compared Blackstone’s approach of bringing investors to borrowers without bank middlemen to that of a “farm to table” restaurant.
Apollo owns annuities giant Athene, a voracious consumer of investment-grade debt. The firm underwrote $18 billion of deals in its investment-grade solutions business for companies such as Intel Corp., Vonovia SE, Air France-KLM and BP Plc in the past year.
While this type of lending looks vanilla on the surface, the yields on the deals suggest otherwise.
Borrowers can expect to pay about two percentage points more than what they would to sell a bond in the public market, in return for more flexible terms, according to Apollo. The spread can be less in other parts of the privately placed investment-grade market.
Still, many accounting firms and ratings agencies don’t always count loans issued against corporate assets as debt on borrowers’ corporate balance sheets. In other words, more debt can be incurred without leading to a downgrade — a major perk for borrowers.
–With assistance from Neil Callanan and Davide Scigliuzzo.
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