(Bloomberg) — Banks are taking advantage of lower interest rates to pull corporate debt deals from private equity funds, making a big comeback after losing market share in recent years.
Almost $30 billion of private debt has been refinanced through syndicated loans in more than 70 deals so far this year, according to Bank of America Corp. research, as more borrowers look to lower interest costs.
Banks and private equity lenders have been in intense competition to secure funding for what has been a thin pipeline of mergers and acquisitions. Expectations of lower interest rates have helped the joint loan market bounce back as borrowers look to lower interest costs.
“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 open and banks are aggressively underwriting.”
In recent weeks, K2 Insurance Services, Circor International Inc. AND Alegeus Technologieseveryone has said goodbye to their private loan lenders for joint debt to cut costs. Circor's new loan could reduce the company's interest rate margin by about 2.25 percentage points, Bloomberg reported.
Read more: US companies raising billions in debt markets after rate cut
The savings are significant for borrowers who had high-cost loans. In the case of Vista Equity Partners' Alegeus, the private loan used to buy the business had a whopping 8.25 percentage points spread over the secured overnight financing rate. The company sought a price of 5 to 5.25 percentage points above benchmark in its joint venture agreement issued 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 middle-market lenders can participate,” said Clay Montgomery, a vice president in Moody's Ratings' private credit group, who argued that low-spread deals make it more difficult for funds of private credit. to meet their return on capital objectives. “We've seen the high 400s, but beyond that, the direct lender will struggle to put a tighter spread on their book and make the ROE math work.”
Veritas Capital-backed energy consulting firm Wood Mackenzie Ltd. it also traded private debt on public markets earlier this year. refinancing unitranche debt led by HPS Investment Partners in January and earning $37 million in annual savings over the life of the new seven-year loan, Bloomberg reported.
The change comes at a 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 leveraged buyout market. Private credit dry dust, the amount of money committed to funds that have yet to be disbursed, hit an all-time high earlier this year.
Read more: Private credit has a lot of money and not enough places to put it
“A big increase in M&A activity will take time,” Bellis said. “We've been busier with refinancing, rerating, increasing activity, but I don't think there's going to be a flood of M&A all of a sudden.”
Private loan managers are still busy. And to be sure, some deals are going in the opposite direction, being financed by syndicated loans and into the hands of private debt funds.
Bill Eckmann, head of Americas principal finance at Macquarie Group Ltd., said the firm has expanded his team in order to take full advantage of the growth in private credit opportunities.
“There are still a number of loans that are not suitable for the debt capital markets,” Eckmann said. “It can be tough for buyout companies to continue to get ratings — it's harder to do portability, in-kind payments and late drawdowns on term loans,” he said, referring to features often found in private deals. of the loan.
Competition for smaller transactions may not be as fierce. But if the Federal Reserve continues its rate-cutting cycle, direct lenders may be forced to make more concessions to borrowers in order to keep their business.
“The core middle market is not losing a lot of deals,” said Montgomery at Moody's. “But at the broad end, they're going to feel more pressure because the syndicate market is their real competitor.”