A growing number of companies achieved significant interest expense savings in the direct lending market via repricings in 2024, a trend expected to continue this year.
In the current market, direct lenders are receiving calls from private equity sponsors with requests to slash pricing by 100 bps, sources say. Indeed, one advantage that private credit lenders have long touted — that a sole lender or small lender group is easier to work with — can be seen as a double-edged sword: With few administrative obstacles, it’s relatively simple for a loan issuer or sponsor to request, and achieve, a pricing cut on a private credit loan.
Borrower-friendly market conditions are not helping lenders: Until new buyouts and other M&A activity increase meaningfully, lenders expect more repricings. In some cases, they are even willing to waive prepayment protection to keep their best-performing credits in the portfolio.
BDC filings illustrate the magnitude of this trend. LCD identified 600 unitranche and senior secured first-lien term loans with a spread reduction of at least 50 bps between the end of 2023 and September 2024. To compile this analysis, we compared Q4 2023 and Q3 2024 holdings of roughly 120 BDCs and identified facilities where cash spreads declined while maturity dates were unchanged. The analysis excludes holdings with a PIK interest component in either quarter and those marked as non-accrual.
In the first nine months of 2024, more than 50 companies repriced unitranche debt, cutting the spread by 96 bps, to Sofr+514, on average, while retaining the maturity date. Roughly 40% of these companies slashed pricing by at least 100 bps. A handful of borrowers reduced spreads by at least 200 bps, BDC filings show. For example, LCD News reported in May that Coupa Software repriced a $2.44 billion unitranche loan to S+550, a savings of 200 bps. The loan is structured as a recurring revenue financing. Thoma Bravo acquired the company in an $8 billion take-private transaction in 2023.
The sample of repriced senior secured first-lien term loans was much larger, covering 425 borrowers, but the spread reduction was lower, at 88 bps, on average. Although the bulk of BDC holdings result from direct lending to middle-market companies, BDCs also invest in broadly syndicated loans to larger borrowers. Therefore, this cohort includes some companies affected by the record-breaking repricing wave that swept through the BSL market last year.
About 41% of senior secured first-lien term loans in the analysis featured spread cuts of at least 100 bps in the first nine months of last year, including more than a dozen borrowers that achieved a cut of 200 bps or more. For example, Magnet Forensics, a portfolio company of Thoma Bravo, cut the spread on its $535 million term loan to S+525, from S+800. Blue Owl is the sole lender.
The company had considered refinancing the debt in the syndicated loan market, according to LCD News, highlighting the competitive dynamic between direct lenders serving larger borrowers and the BSL market. For reference, new-issue spreads on syndicated loans to B-minus rated companies — the closest proxy for a typical direct lending borrower — hovered around S+425 in the first nine months of 2024.
Direct lending repricings contributed to the overall spread compression trend evident in BDC filings. Nearly 30% of all unitranche facilities held by BDCs as of September 2024 fell into the S+500 to S+549 range, up from just 11% at the end of 2023, while the share of sub-500 spreads rose to 12.5% from less than 4%. On the other end of the spectrum, just 32.5% of unitranche holdings had spreads of S+600 or higher at the end of Q3 2024, down from 56% in December 2023.
The trend is similar for senior secured first-lien term loans. Nearly a quarter of all BDC holdings carried spreads of less than 500 bps at the end of the third quarter, up from 20% at the end of 2023. The biggest share (22%) fell into the 500-549 bps range, more than twice the Q4 2023 reading. Meanwhile, the 600 bps or higher cohort fell to just one-third of all holdings, from 51%.
Featured image: Shutterstock
Learn about our editorial standards.
