While loan volume in the $890 billion private debt market has been strong, the asset class may see increased competition as larger borrowers look to public markets to lower their financing costs.
“It’s been really robust thus far as volume is concerned,” Jérôme Marquis, managing director and head of corporate credit at CDPQ said during a Tuesday virtual Bloomberg News event. “The market is becoming a lot more competitive and competition doesn’t only come from private debt, but it comes from leveraged loan markets and high-yield markets.”
Marquis said that within his portfolio, he’s seeing more loans refinanced through public markets. That’s because mid-sized companies in the U.S. have been increasingly turning to syndicated loans to refinance out of the higher costs that come with private lending -- and as leveraged loans and high-yield bonds are poised for strong issuance this year. FS KKR Capital Corp., for example, said that borrowers repaid $460 million of debt in the first two months of the year.
“Private debt is not alone on the island,” Marquis said, adding that concessions need to be made “because we see the public markets being more competitive.”
Cécile Mayer-Lévi, head of private debt at Tikehau Capital, also noted the “very active” leveraged loan market in tandem with large private debt funds currently raising capital to lend. “So, that’s very wide competition all over the place and it’s not only one or the other,” she said.
By the end of 2020, that competition had helped push leverage and pricing to borrower-friendly levels not seen since before the pandemic, according to Susan Kasser, co-head of Neuberger Berman’s private credit business.
“So not worse than 2019, but no longer better,” she said. “Whereas, I would say in July, terms were better, deal flow was thin, but terms were better.”
And as private equity sponsors chase after investments of similar quality, the emphasis on pre-empting an auction is bigger now than 2019, Kasser said. That means lenders that are able to write large checks have a better chance at winning deals than their smaller peers. “I would say we continue to see opportunities where speed, flexibility and certainty trump price.”
The early days of the pandemic have allowed both lenders and private equity sponsors to see who they want to be in business with in time of crisis.
“The private equity firms get a taste of which one of the lenders in their existing investments are long-term minded and cooperative,” Kasser said. “As opposed to people who are maybe holding out for the last dollar and the last basis point on an amendment.”