Private Credit Is Eyeing Bigger Margins on Loans: Credit Weekly

(Bloomberg) -- The turmoil in global markets this past week is causing private credit funds to question whether they should reconsider the ever-tighter loan margins they’re demanding.

Industry stalwarts such as Ares Management Corp. and Blackstone Inc. have been charging less for private credit for most of this year, according to data compiled by Bloomberg News, as they try to snatch business away from the syndicated loan market. But that strategy may change after recession fears have risen amid a slew of worrying economic reports.

The market turmoil that followed is causing a rethink about “some of the desirability of the spread compression that we’ve seen in the last few months,” David Golub, chief executive officer at Golub Capital BDC Inc., said in an earnings call this week. It “may take some of the steam out of some of the parties that have been most receptive to reducing spreads in the private market.”

The $1.7 trillion private credit industry has grown rapidly in the past few years, as higher rates forced buyout firms to look further afield for funding while traditional lenders pulled back. Banks have become more competitive in recent months as they try to retain leveraged loan market share. In response, credit funds started pushing their pricing down, raising concerns about a potential race to the bottom.

For bigger private credit loans, the interest above benchmarks that lenders demand has fallen by at least 100 basis points, or 1 percentage point, since the start of last year, according to a Bloomberg analysis. 

For example, the private credit loan helping to fund Genstar Capital’s purchase of a stake of payment processor AffiniPay came in at 4.75 percentage points over the Secured Overnight Financing Rate. 

In Europe, a deal for Iris Software had portions that priced at 5 percentage points over the Sterling Overnight Index Average and 4.75 percentage points over the Secured Overnight Financing Rate. Last year, margins were more typically at least 575 basis points.   

“If the data starts to present a clearer hard landing expectation,” then “we are going to have the opportunity to widen credit spreads,” said Andrew Davies, head of CVC Credit in London, but “we probably need a longer period of volatility to support a significant move wider.” 

This week’s turbulence did highlight one advantage of private credit for borrowers, however. While the debt is typically more expensive, there is no risk for borrowers that the pricing increases through syndication. A CVC-led consortium opted for private credit this week to help finance its £5.4 billion ($6.9 billion) buyout of Hargreaves Lansdown Plc, an investment platform.

By contrast, loan deals for SeaWorld Parks & Entertainment Inc., SBA Communications Corp. and Focus Financial Partners in the broadly-syndicated market were postponed as the risk premium on junk-rated corporate bonds rose to its highest level since late 2023. Prices on US leveraged loans fell to their lowest level of the year on Aug. 5.

“One of the benefits of private credit, and we’ve seen some deals pulled from the broadly syndicated market this week, just given some of that volatility, is better execution at the end of the day,” Bryan High, who leads the global private finance group at Barings, told analysts on a call this week. “We’ve definitely seen an increase in activity.”

Week in Review

On the Move

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.