Loan Note: Direct lending converges with syndicated loans; ESG issuances fall

As private debt firms target larger deals, they are coming under pressure to sacrifice investor protections. Plus: ESG bond and loan issuance takes a dive and Intertrust Group charts private debt's growth in numbers. Here's today's brief for our valued subscribers only.

They said it

“We expect cost input pressures to increasingly weigh on corporate margins through the year, and we anticipate default rates to grow to 2.5 percent as of 31 December 2022”

Nicole Serino, a credit markets research analyst at S&P Global Ratings, commenting on the situation in Europe.

First look

Convergence of terms: private debt deals begin to resemble syndicated loans (Source: Getty)

Direct lending and syndicated loan terms converging
One notable aspect of direct lending’s exceptionally active year in 2021 was the migration to larger deals, especially mega-sized unitranche loans. It’s a trend that seems sure to continue throughout this year as large borrowers identify high leverage and reliable execution – possibly without the need for syndication – as attractive features of private credit amid the volatility of global events.

However, this doesn’t come without challenges – one of which is competing with a syndicated market that has steadily eroded investor protections. A new report from law firm Latham & Watkins sees increasing terms convergence between direct lending and syndicated loans, a trend that the firm says it expects to continue.

L&W says it has seen an “erosion of many” of the terms that once differentiated direct lenders, while acknowledging that certain key features remain (but more so at the smaller rather than large end of the direct lending market). “Particularly in the US,” the report notes, “the intercreditor provisions in a private capital structure are moving ever closer to the syndicated Term Loan B intercreditor package.”

The report is well worth a read, with direct lending only one of the areas covered along with structured credit, infrastructure, real estate, growth and structured capital and the US Securities and Exchange Commission focus on investment funds in general.

ESG bonds and loans decline in Europe
European ESG bond and loan issuance tumbled in the first quarter of this year, according to the latest figures from the Association for Financial Markets in Europe. Total issuance was €136 billion in Q1, representing a 32.4 percent fall year-on-year and a decline of 27.2 percent compared with the previous quarter.

ESG bond issuance represented 14.1 percent of overall European bond issuance in the quarter, down from 19.5 percent in the whole of 2021. The report noted market conditions were unfavourable for primary issuance with a resulting absence of jumbo ESG deals from the EU Commission and other sovereigns.

However, the sustainable-linked bond market was the exception to the rule, showing a 4.4x year-on-year increase (26.5 percent quarter-on-quarter). Sustainable-linked bonds is one of the categories covered by AFME with the others being ESG-labelled bonds, transition bonds, green-linked loans and sustainable-linked loans.

Private debt’s growth in numbers
It’s a rapidly expanding universe. A new report from administration services firm Intertrust Group reveals that, according to their measurement, there are now 3,967 private funds in existence worth a combined $1.6 trillion. This represents a 56 percent increase in the number of funds and a 53 percent increase in their value over the past five years.

To put this in context, Intertrust Group says there is currently around $5 trillion invested in alternative fixed income-oriented funds worldwide (excluding mutual funds and business development companies) and 2,500 managers of almost 15,000 credit and fixed income funds.

Intertrust Group breaks down credit funds into private credit, speciality finance, asset-based finance, structured credit, diversified credit and non-distressed and distressed assets. Of these, private credit and diversified credit have seen the biggest growth over the past five years of 61 percent and 39 percent, respectively.

As private credit grows, more and more niche areas are emerging such as supply chain finance, litigation finance, sports finance and aviation finance. These strategies, the report says, are creating the possibility of higher returns but also more complexity.


Senior lending role for Radstake at ING
ING appointed Krista Radstake as global head of lending in ING Wholesale Banking towards the end of April. Radstake reports to Andrew Bester, global head of Wholesale Banking, and will be a member of the Wholesale Banking management team. She succeeds Vincent Maagdenberg, who was appointed chief transformation officer at ING Wholesale Banking on 1 April.

Radstake has 25 years’ experience at ING, most recently as head of EMEA Lending and global lead for corporate sector lending where she led a global team responsible for origination, execution and maintaining a lending portfolio of over €100 billion of assets and obligations. She has experience in lending, credit risk management and structured finance.

CPP commits $300m to Gordon Brothers
Gordon Brothers, the Boston-headquartered advisory, restructuring and investment firm has received $300 million in financing from CPPIB Credit Investments, the CPP Investments subsidiary. The financing increases the firm’s capital base to more than $1 billion.

Gordon Brothers provides short- and long-term capital to clients undergoing transformation. It lends against and invests in brands, real estate, inventory, receivables, machinery, equipment and other assets. In providing its special situations financing, the firm partners with management teams, private equity sponsors, strategic buyers and asset-based lenders.

CIFC and Israel’s IBI launch CLO fund
US-based manager CIFC Asset Management has teamed with Israel’s IBI Investment House to launch the IBI CLO Strategies Fund, a vehicle investing in collateralised loan obligation debt, equity and warehouses. IBI is the fund manager while CIFC is the sub-adviser of the fund.

The fund aims to offer eligible Israeli investors access to CLOs across the primary and secondary markets in the US. The fund will offer monthly subscriptions with quarterly redemptions.

Tzvika Katzman and Jason Ziegler worked together to structure the fund. Katzman is a senior investment manager at IBI and becomes chief executive officer of the fund, while Ziegler is a CLO specialist at CIFC and becomes the fund’s managing director. They are joined by CIFC’s Jay Huang and Matthew Andrews, who become co-portfolio managers.

LP watch

Institution: Arizona Public Safety Personnel Retirement SystemHeadquarters: Phoenix, USAUM: $17.31 billion Allocation to alternatives: 33.1%

Arizona Public Safety Personnel Retirement System approved a $150 million commitment to AlbaCore Partners III at its April 2022 board of trustees meeting, a contact at the pension confirmed to Private Debt Investor.

AlbaCore Capital Group launched its third private debt vehicle in May 2021, which has a current fund size of €1.5 billion and a target fund size of €2 billion. The firm is raising its third mezzanine fund to invest in Western Europe.

Arizona PSPRS currently allocates $1.73 billion to private debt investments, comprising 9.97 percent of its total investment portfolio. The pension’s recent private debt commitments have focused on venture, mezzanine and senior debt vehicles in North America and Western Euro.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.