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Leveraged Loans

Banks eye low-rated refinancings to claw back business lost to private credit

Based on PitchBook LCD data, 21 companies have issued a broadly syndicated loan so far this year to refinance $8.3 billion of debt previously provided by direct lenders.

A drop in borrowing spreads, coupled with increased investor appetite for risk, has created another opening for banks to regain some of the market share lost to private credit providers in recent years: refinancings, especially for lower-rated borrowers.

Based on PitchBook LCD data, 21 companies have issued a broadly syndicated loan this year to refinance $8.3 billion of debt previously provided by direct lenders. Via these transactions, the BSL market has clawed back some of the $19 billion-plus of loans that were repaid in favor of private credit in 2023.

Most of these 21 borrowers — all of which are backed by a private-equity sponsor — take out more expensive privately placed second-lien facilities that were issued alongside a syndicated term loan in the past few years. However, a few, such as the recently launched Groundworks and Wood Mackenzie, refinance first-lien or unitranche debt provided by direct lenders.

More than half of the companies in the sample are rated B-minus or B3. Indeed, B-minus borrowers tapped the BSL market for refinancings at a record clip in January, issuing $17.3 billion of term loans as new-issue BSL spreads retreated to multi-year lows.

The average spread on new or repriced loans issued to these lower-rated borrowers is S+420 this quarter, a four-year low, down more than a point from S+535 in Q1 2023. These levels are significantly below typical pricing in the direct lending market, offering borrowers an opportunity to reduce interest expense via a BSL refinancing.

For example, the 2023 covenant-lite financing for Groundworks, which was targeted to direct lenders, included a $750 million first-lien term loan due March 2030 and a $125 million delayed-draw term loan at pricing of S+650, with a leverage-based margin step-down to S+625. Price talk for the new $815 million term loan is S+375-400, with a 0% floor. Wood Mackenzie’s new $1.315 billion B term loan allocated with a spread of S+350 (0% floor) earlier this month. Private credit portfolios show the existing unitranche loan due February 2030 with pricing of S+675 (0.75% floor).

Second liens
Looking at transactions that refinanced second-lien paper, PCI Pharma last month issued a $440 million fungible add-on first-lien term loan priced at S+CSA+350 to refinance a privately placed $380 million second-lien term loan (S+700) due 2029. LCD estimates roughly $4 billion of privately placed second-lien facilities were repaid with proceeds of a new syndicated first-lien term loan so far in 2024.

To put this number into perspective, speculative-grade borrowers issued $35 billion of such facilities from 2021 through 2023, and the bulk of this debt is likely still outstanding given the difficult credit conditions that followed. These borrowers raised second-lien financing alongside a broadly syndicated first-lien term loan, meaning they already have a track record in the BSL market. Should current market conditions persist, more borrowers are sure to follow suit, to opportunistically reduce interest expense.

Away from the syndicated loan market, UK insurance broker Ardonagh Group recently priced a cross-border, three-tranche bond offering alongside renewed commitments from the borrower’s direct lenders to refinance its £3.48 billion-equivalent unitranche. The direct lending portion of Ardonagh’s $5 billion-plus debt refinancing totals $2.7-3 billion.

Aside from refinancings, the bank-led market has landed some high-profile LBO deals recently, a segment private credit has dominated in recent years. Most visible here is the $5 billion credit backing KKR’s recapitalization of Cotiviti. That issuer had explored a deal in the private credit market one year ago, though that transaction fell through.

Featured image: Catherine Falls Commercial/Getty Images

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