More than $11bn (£8.7bn) worth of private credit deals have been refinanced to the broadly syndicated loan (BSL) market this year so far, according to Moody’s.
The ratings firm said pricing was one reason for this, with borrowers benefitting from lower financing costs in the BSL market, as banks seek to regain market share from direct lenders.
However, it also pointed out that the lines are blurring between private credit and BSL deals. The firm said banks have been offering more flexible financing solutions, including delayed draw term loans (DDTL) and payment-in-kind (PIK) loans sharing in first-lien collateral.
Moody’s also observed more collaboration between the two markets to help finance transactions, including first lien term loans from BSL lenders and second lien loans from private credit investors.
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The firm said these developments improve liquidity options for borrowers, but they also increase complexity, making solutions more opaque and blurring market disciplines.
The greater competition between the markets has also increased risk tolerance, with more B3-rated issuers refinancing into the BSL market than 12 months ago.
“This shift marks a clear change from 2022 and 2023 when BSL liquidity contracted in the face of higher rates and consequent credit concerns,” the firm said in a note today.
“Direct lenders offered financing to low rated, highly leveraged borrowers, often at a higher cost, but sometimes with more bespoke solutions, including increasing levels of PIK debt.”
The firm said that in a bid to stay competitive banks have returned to underwriting deals and substantially lowered pricing, to the extent that borrowers are saving up to 200-300 basis points on BSL lending.
Moreover, Moody’s said private credit’s alignment with insurance companies has increased the level of capital that needs to be deployed. Direct lenders are trying to remain competitive by adjusting their own pricing.
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“For example, we understand direct lenders recently repriced Trescal’s €500m unitranche loan, with a sizeable cut to the initial margin arranged in 2022,” the ratings agency said.
“But a borrower-friendly environment will encourage weaker discipline among lenders. We also expect to see weaker terms in direct lending credit agreements. For now, despite ample dry powder, the market is still distinguishing between stronger, less cyclical and well-known names and those that are more cyclical with a less favourable credit story. However, as competition intensifies, risk appetite will increase.”
Moody’s said that to date much of the flip-back to public markets has been focused on refinancings, but it expects to see more leveraged buyouts in the coming months.
“While we believe these two markets will develop as complementary funding channels for private equity sponsored transactions over time, this process is still in the early stages,” it concluded.
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