One of the most notable trends of recent years within private debt has been its ability to encroach on larger deal territory that was once the exclusive preserve of the bank-dominated syndicated loan market. The evidence is now growing that this will not be a brief window of opportunity – as was widely predicted, even by private debt professionals themselves – but may in fact be the “new normal”.
The initial wave of opportunity for private debt was as a liquidity option at a time when the banks were pulling down the shutters. Confronted by a succession of challenges such as covid, rising interest rates and the war in Ukraine, banks’ appetite to lend has been on the wane for some time and the larger private debt funds have been able to step into the funding gap as a straight replacement for bank finance.
Few expected private debt funds to continue being a major player once market conditions had normalised. The banks represent a cheaper cost of finance, have longstanding relationships with the corporate world and still might be considered the ‘natural choice’ for borrowers despite private debt funds’ best efforts to impress with their flexibility and speed of execution.
But with rising interest rates putting increasing pressure on borrowers, as interest coverage narrows, there are increasing concerns that banks may not have either the appetite or the range of solutions to adequately address the challenges of the coming refinancing wave – when loans taken out during a period of uniquely low rates reach maturity in a very different environment.
Unlike the “straight replacement” period mentioned above, this coming phase is one where private debt is called upon to plug gaps – most obviously in the junior capital layer, and more specifically through payment-in-kind options which relieve the rate-induced cash pressure on balance sheets. This has already been seen in the multi-billion refinancings of software firms Finastra and Hyland Software, based in the UK and US respectively.
It will be interesting to see how many of the maturing loans can be refinanced by the syndicated market. There is a growing belief that private credit firms could play a major role, offering creative and flexible solutions beyond the wit of the banks in exchange for concessions from private equity sponsors. Finastra and Hyland may well be a sign of things to come.
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