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Private Credit

Private credit lenders yield some ground as competition increases

As the competition has accelerated in the last three months, spreads and upfront fees on recently issued private credit loans have narrowed, market sources say.

After a largely slow year in originating new loans, the past three months have seen direct lenders pick up the pace. Yet they are finding the market increasingly crowded amid slim pickings for high-quality deals.

Money had been sitting on the sidelines earlier this year, but private credit lenders are now returning to the deal market, said Bill Eckmann, head of principal finance at Macquarie Capital, which has a direct lending arm that lends to middle- and upper-middle-market companies.

“People are now feeling a bit more confident about the broader macro than they did six months ago,” Eckmann said.

As the competition among lenders accelerates, some corporate borrowers in the private credit market may be able to negotiate better pricing and terms than they could have a few months earlier, with lower spreads and smaller original issue discounts, or OID—which is in effect an upfront fee that attracts lenders to provide the financing for the loan.

“Terms have become more competitive over the last 90 days,” Eckmann said.

Spreads and OIDs on unitranche loans, a type of loan that blends senior and junior debt into a single facility, have compressed anywhere from 50 basis points to 100 basis points, he added. His firm focuses on unitranches of $200 million to $1 billion.

The competition is particularly acute for high-quality assets, as there is too much money chasing these same opportunities.

To illustrate an example, a unitranche loan issued to a high-quality company may price between 550 basis points and 575 basis points over the secured overnight financing rate, with an OID of 2 to 2.5 points. In contrast, three months ago the same deal might have priced at 650 bps with an OID of three points, Eckmann said.

Private credit lenders are also willing to accept higher leverage ratios for high-quality assets, said William Brady, the head of Paul Hastings’ Alternative Lender and Private Credit Group.

This often translates into a net debt-to-EBITDA ratio of 6.5x to 7.5x for companies in the upper middle market, he said.

The average debt-to-EBITDA ratio for US leveraged credit, which includes both broadly syndicated loans and private credit, was around 4x at the end of the second quarter, according to an Oaktree quarterly report.

One recent example of a high-quality asset that received favorable terms was Navex Global, a BC Partners-backed US risk management software provider with a SaaS model. The borrower in November obtained a $1.2 billion senior credit facility to support a dividend recapitalization of the company, and the closing leverage of this deal was around 7.25x, according to PitchBook LCD.

“If you think the credit is a very high-quality credit, you’re going to be aggressive to try and win that deal,” Eckmann said.

He added that the so-called high-quality credit opportunities are among corporate borrowers with a long record of solid earnings—at least $50 million in EBITDA—and strong recurring revenue. Those could be software providers, tech-enabled services companies or insurance services specialists including insurance brokerage firms.

That said, these borrowers also need to have solid management teams that lenders and the private equity buyers believe in, Brady said.

Whether the pendulum will continue to swing in favor of borrowers next year remains to be seen. If M&A activity rebounds, private credit lenders will find more deals to which they can deploy their capital, which may alleviate the competition for deals and widen the spreads again.

Featured image by Le Club Symphonie/Getty Images

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