Since then, high-yield bond financing has hit an implied cost of around 9% in the US and 8.7% in Europe, per Bloomberg gauges measuring the cost of new single B rated debt. At the same time, US leveraged loans are now yielding around 8.8% in the secondary market, according to a JP Morgan index tracking single B loans.
“For the best credits, we have seen pricing as low as 5%, where people are killing themselves to get this deal done,” said Norbert Schmitz, a managing director in Houlihan Lokey’s debt advisory practice. “For the normal deals, you may see 650 or 675 basis points.”
Pricing on so-called unitranche loans -- a blend of senior and subordinated debt and a structure beloved by non-banks -- is typically in the region of 575 to 650 basis points over the interbank rate. That’s not budged much even as broader credit markets are roiled by recession fears, the people familiar said.
At 5% or even anywhere under 7%, direct lenders are also undercutting the floating rate syndicated loan market. Recent public loan deals done include Kofax, which priced at a yield of 8.2% while Gaming1’s 300 million euro ($316 million) term loan B is seen with a 7.4% yield, according to Bloomberg calculations.
By contrast, Europe’s largest-ever direct lending deal for UK software business The Access Group saw lenders charge a floating-rate margin of just 575 basis points for the 3.5 billion pound ($4.3 billion) financing, according to people familiar with the transaction.
Comparisons with the junk bond market are far from perfect of course, given private deals tend to come with floating-rate obligations and stronger lender protections. The financing for Norgine BV show how the industry is looking for tighter covenants than is standard in the public market. And the asset class is no magic financing solution for all borrowers.
Trillion Plus | Private credit managers have amassed $1.2 trillion from investors
Yet for all that, evidence keeps piling up that the private market is offering big firms a competitive capital-raising solution. In Europe for example, the junk bonds backing Lone Star Funds’ acquisition of Manuchar NV were sold at the largest discount for investors in a decade.
By contrast, when BC Partners-controlled Davies Group tapped its direct lender for an extra £350 million ($426 million) of debt on top of its outstanding unitranche loan, the insurance services firm managed to secure tighter pricing, according to a person close to the transaction, who declined to be identified because the details are private.
To Daniel Lamy, JPMorgan Chase & Co.’s head of European credit strategy, this dynamic can’t continue as the monetary backdrop darkens.
“Private credit funds will re-adjust the level at which they are willing to do deals,” he said. “Pricing in that market was slower to react to the changing macro environment, and we don’t think it’s sustainable for private creditors to lend inside public market levels.”
-With assistance from Natalie Harrison and Davide Scigliuzzo.
This article was provided by Bloomberg News.