Banks fight back against private credit boom as borrowers seek out savings
Private credit funds are experiencing increased competition from the broadly syndicated loan (BSL) market as borrowers go back to banks to obtain better pricing on their debt, according to a new PitchBook report.
A handful of borrowers returned to the BSL market in February and March, PitchBook’s LCD division found, as they took advantage of receptive conditions to refinance debt. This move away from private debt to BSL is expected to continue throughout the year and boost BSL supply.
According to LCD’s European Credit Markets Quarterly Wrap, these transactions refinanced roughly €4.2bn (£3.6bn) of private credit facilities in the first quarter. One of the most recent examples was P&I Personal & Information, an HR software company based in Germany, which syndicated a €455m five-year deal loan, refinancing a unitranche facility that was placed in December 2022.
LCD says that costs are the main reason borrowers are returning to the syndicated market.
“Conditions for direct lenders shifted markedly this year as banks weaved their way back into the market, bringing renewed competition to private credit lenders, especially in the large-cap space,” analysts at LCD noted.
Read more: Competition intensifies between private credit and syndicated loans
Quoting an adviser, the report said that there are now two types of sponsors in the market, “those who are not comfortable with the scrutiny, ratings and slower processes in public markets, and those who would prefer to pay less”.
The ratio of European LBOs financed by direct lending versus the BSL market has fallen from 10:1 in the fourth quarter of 2023 to 5:1 in the first quarter of the year.
And although refinancing and add-on deals are expected to remain abundant, not all of it will go to private credit funds. Other examples of companies that have tapped the BSL market recently include Ardonagh and April Insurance.
It continues to be a challenging market for private debt funds, but the asset class is still expected to grow from $1.7tn (£1.3tn) today to $2.8tn in the next five years.
Read more: Private debt investors expect rise in dealmaking and fundraising
“One of the first outcomes from increased competition with banks is a push for repricing, as private credit attempts to counter the tight margins on offer in the syndicated market. Indeed, Trescal and Unither — two French companies — both repriced tighter in the first quarter,” LCD analysts noted.
One lender said there is a pricing decrease of around 500 to 525 basis points for large caps, 600 to 650 bps for mid-caps and up to 700 bps for smaller companies.
But despite the competition, direct lending remains the leader in large-cap financings. In the first quarter, 29 per cent of direct lending transactions were sized at more than €1bn, LCD found, while in 2021, 2022 and 2023 such tickets accounted for 6-8 per cent of deals.
One consequence of increased competition has been increased collaboration between private debt funds and banks. In 2024 so far, 27 per cent of European direct lending buyout deals featured both players together, while in 2020 the same measure was just six per cent, LCD found.
Read more: Moody’s predicts ongoing boom in European private credit
