Direct lenders are getting aggressive, capturing a bigger share of redemptions

In the rush to fund a boom in private equity buyouts, more companies are heading to direct lenders, who are mining dry powder at an ever-faster pace and sweetening the terms of deals to entice borrowers.

A notable example is Thoma Bravo’s roughly $10.7 billion privatization deal for San Francisco-based software company Anaplan in March. The tech-focused private equity giant secured $2.6 billion in debt financing from a group of direct lenders, including Owl Rock Capital, Apollo Global Management, Golub Capital and Blackstone Credit, within days. Thoma Bravo has bypassed leveraged debt financing and other debt markets that have traditionally processed large debt transactions for leveraged buyouts.

Direct lenders are expected to continue to capture more market share in financing large private equity deals, while becoming a more viable alternative to high yield bonds and syndicated loans from traditional banks.

Private equity activity remains robust so far this year, with sponsors taking advantage of low public market valuations for acquisitions.

Lenders in the syndicated loan market are taking a more cautious approach as they weigh credit risks alongside headwinds such as rising interest rates, inflation and geopolitical tensions, demanding higher prices and provisions okay flexible. This often adds uncertainty to the syndication process.

Issuance in the risk debt market has slowed this year following Russia’s invasion of Ukraine. Leveraged loan volume in February was $28.7 billion, up from $71.6 billion a year earlier, according to data from LCD, a unit of S&P Global.

This allows private debt investors to seize opportunities, filling a void as others retreat from a relatively risky segment of the lending market.

Direct lender agreements have appealed to sponsors and borrowers because of their ability to close quickly and offer greater confidentiality and certainty in execution. They also offer lower underwriting costs, which makes them more attractive than syndicated loans.

“Over the past few weeks, when financial sponsors were preparing to raise debt funds for transactions, they began to go through a two-track process even though they were initially considering a largely syndicated loan,” said Jake Mincemoyer, head of US leveraged finance. practice at Allen & Overy. “Sponsors and companies were trying to compare the terms of potential deals offered in the [syndicated loan] market with what could be achieved through a privately placed unitranche loan.”

Additionally, some debt products are difficult to obtain in the syndicated loan market, creating an opening for private lenders.

One such example is the deferred draw term loan, which allows a borrower to draw down money as needed over time. It is an important leverage tool for buy-and-build strategies, which need a lot of dry powder to be able to act quickly and effectively for follow-on acquisitions.

However, conducting such transactions in the syndicated loan market is considered more expensive and more difficult under current market conditions.

“All of these benefits really outweigh a little extra cost [charged by private debt]said Gregory Cashman, head of direct lending at Golub Capital, a direct lender with more than $45 billion in capital under management.

And thanks to the abundance of dry powder thrown up over the past couple of years, direct lenders now have greater firepower to compete with banks – and in some cases supplant them – in providing debt financing for big deals. redemption.

There is no shortage of large unitranche loans exceeding $1 billion, which was rarely the case several years ago. These deals are usually offered by one or more deep-pocketed private loan funds and business development companies.

Last year, Thoma Bravo turned to the private credit market to fund its roughly $6.6 billion takeover of Stamps.com.

In another case, KKR approached both private credit companies and banks while pursuing the acquisition of Spanish fertility clinic chain Ivirma Global, Bloomberg reported.

But to access some large deals, direct lenders had to relax covenants to be considered competitive.

According to Eric Klar, co-head of the US private credit and direct lending group at White & Case.

Klar cited the use of financial covenants as an example. Under such provisions, covenants would only take effect when a borrower draws on its revolving credit facility up to a certain threshold. In other words, these covenants only protect creditors who have provided revolver lenders and, sometimes, term A loans.

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About Galen A. Williams

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