(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.
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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
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The week began with a bang that slowly faded into more of a whimper, as spreads on US investment-grade corporate bonds surged to 111 basis points on Monday before settling back down to 103 basis points on Thursday, about 10 basis points above their level on July 29.
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Bonds broadly gained after a weaker-than-expected jobs report on Aug. 2 raised concerns that the economy was slowing at a faster rate than previously understood, and the Federal Reserve might have to be more aggressive about cutting rates.
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But corporate bonds had trouble keeping up early in the week, pushing credit spreads wider. Credit markets broadly shut down, with no companies selling debt on Monday in the high-grade US market. Even in the staid world of asset backed securities, T-Mobile US Inc. postponed a sale of more than $500 million in asset backed securities.
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Later in the week, markets stabilized, helped by a Bank of Japan official signaling it wouldn’t keep hiking rates if markets are unstable. On Wednesday, companies led by Meta Platforms Inc., parent of Facebook, sold about $32 billion of US high-grade corporate bonds. In Europe, a pair of deals hit on on Thursday, effectively reopening that market.
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For riskier borrowers, the turmoil in global markets threatened to end a summer debt boom that helped some of the riskiest US companies cut borrowing costs, push out maturities and even defer interest payments.
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The change in tone was obvious on Monday, when SeaWorld Parks & Entertainment Inc. shelved its planned refinancing of a $1.55 billion term loan, while SBA Communications Corp. postponed the repricing of a $2.3 billion term loan. On Tuesday a $3.65 billion package for Focus Financial Partners was delayed, and market participants expect more lower rated deals will be pulled. In Europe, three days this week saw no bond sales.
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But in a sign of how fear abated later in the week, six borrowers sold more than $4 billion of bonds in the US junk market on Thursday, the busiest day since May.
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As fear rises of potentially slowing economic growth, creditors’ patience with Europe’s delinquent borrowers is wearing thin, with lenders now more willing to seize the assets of companies that fail to pay their debts.
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Creditors are currently running a sales process for Hotel Bauer after seizing the Venetian landmark from the ruins of Rene Benko’s Signa empire. Elsewhere, Carlyle Group took over London Southend Airport following a dispute over an alleged breach of the terms of a pandemic-era rescue package. And Oaktree Capital Management won control of Italian football club FC Internazionale Milano after its Chinese owner defaulted on a loan.
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China’s credit market was in some ways insulated from the tumult of the week. A series of Chinese borrowers turned to the lower cost and relatively-stable yuan bond market to get financing, including Pizhou Industrial Investment Holding Group Co., a Chinese local government financing vehicle.
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ByteDance Ltd., the Chinese owner of TikTok, is preparing to refinance a $5 billion loan by another three years, people familiar with the matter said, in what would be one of the largest such deals for the country’s borrowers this year.
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On the Move
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Royal Bank of Canada’s head of US high-yield debt trading Prashant Radhakrishnan has left the firm, according to people familiar with the matter.
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Mizuho Financial Group Inc. has hired two bankers from Barclays Plc for its leveraged finance and financial sponsors teams in the US, people with knowledge of the matter said. George Lee has joined as a managing director in Mizuho’s leveraged finance group. The firm has also hired Corey LoVerme, who will join as a managing director in its financial sponsors group in November after a leave.
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BlueBay Asset Management’s head of European high-yield, Justin Jewell, has left the firm and will join Ninety One Asset Management, according to spokespeople at the two companies.
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LibreMax Capital is hiring Powell Eddins, who headed US asset backed securities and collateralized loan obligation research at Barclays Plc in New York. Eddins joined Barclays in March 2023 after stints at both Credit Suisse and Wells Fargo & Co., according to his LinkedIn profile.
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Leonard Xie has left Citigroup to join Corbin Capital Partners, where he’ll be a quantitative investment analyst focusing on collateralized loan obligation investments across the firm’s credit platform, according to a Corbin spokesperson.
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Kohlberg & Company, a middle market private equity firm, has hired Zach Bahor from Stone Point Capital as a managing director in credit and capital markets.
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Carlyle Group Inc. is hiring Solomon Cole from AllianceBernstein for its private credit platform, according to people with knowledge of the matter.
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