During periods of volatility, some folks see opportunity, and direct lenders may be among those folks.
Amid the current backdrop of broader instability—and a BSL market that has ground to a halt—the probability that private credit lenders will step up to bridge a lending gap is not only possible, but also what has happened historically.
Private credit made a name for itself in the years after the Great Financial Crisis when it plugged a hole left by banks that had come under regulatory scrutiny and could not lend. The asset class solidified its place as a viable source of financing in times of crisis when the loan market froze up in 2022 and during the regional bank trouble in 2023.
Last week the broadly syndicated market logged a week of no new-issue launches for the first time in two years, save for seasonal breaks at the end of summer and end of the year. Already this week, two deals, ITG Communications and Cardinal, have been pulled from syndication due to market conditions.
Private credit has always been rooted in relationships. In periods of dislocation, even if spreads are meaningfully lower in the broadly syndicated loan market, relationships play a key factor to getting a deal done.
“Many BDCs talk about the power of incumbency in their portfolios,” said Meghan Neenan, head of non-bank financial institutions at Fitch Ratings. “If the sponsor knows the private credit provider will be there to support the growth over time and work with them during periods of dislocation, there is some loyalty that develops there over time.”
Further setting private credit apart from traditional lending are the sectors and borrowers to whom they lend. Most companies in the middle market have limited exposure to immigration, tariffs and onshoring production.
“BDCs tend to focus on non-cyclical industries and are not heavily exposed to manufacturing, industrial/auto or capital-intensive industries,” Neenan said. The top three sectors for BDCs are business services, software and healthcare, she noted.
What’s more, volatility is expected to persist and given that “private credit has shown an ability and willingness to step in to provide financing to a wide range of borrowers” in past instances of market volatility, if capital is less available or uncertain from public markets, borrowers will choose private financing, BlackRock wrote in its April 4 global credit outlook.
ITG Communications’ $525mn recap loan was put on hold on Monday while Cardinal postponed its $1.1bn M&A loan to back H.I.G.’s acquisition of Converge Technology Solutions and subsequent merger with Mainline Information Systems. A refinancing for Finastra that was expected to launch to the BSL market a couple weeks ago failed to materialize.
“It’s unclear what’s going to happen to some of these deals,” said a source. “In most cases, they are underwritten already so banks have time. It’s a different story if it’s best-efforts.”
For its part, Moody’s anticipates that private credit’s certainty of close will give it an edge in the coming months.
“We expect the sector to continue to take market share given its agility, locked-up funding, and lower regulatory burden than its competition,” Marc Pinto, the rating agency’s global head of private credit, said.
In late 2023, a raft of B3/B- rated borrowers needing to address 2024 maturities left the syndicated market with capital from direct lenders. Among those names was the $3.19bn unitranche for PetVet Care Centers and the $3.14bn loan to Hyland. In a frothier market, both may have gotten done, but B3/B- deals were a much harder sell at that time.
Another source noted: “It’s possible private credit will transact on some of the deals. The first deal that comes will reset the market,” he said.
While it remains to be seen whether bank lending is frozen and private credit will prevail, BlackRock noted “banks’ increased focus on bolstering their ability to offer a private credit solution—whether directly or via partnerships—provides further confirmation of private credit’s ‘staying power’ as a viable funding option for a wide range of companies, in a variety of market conditions.”
Krista Giovacco
krista.giovacco@levfininsights.com
+1 917 757 6399
