Companies are increasingly opting to refinance their loans through Wall Street banks instead of direct lenders, taking advantage of better terms offered by a buoyant credit market.
This year has seen around $16 billion in debt being transferred from private funding sources to the syndicated loan and bond markets, as reported by Bank of America Corp. Notable examples include Thryv Holdings Inc. (owner of Yellow Pages) and Encora Digital, which have both moved to secure leveraged loans at more favorable rates.
The attractiveness of leveraged loans has grown, with companies finding the opportunity to secure financing at lower interest rates and with fewer restrictions than those imposed by direct lenders. This shift is facilitated by the possibility to prepay private loans through call options, sometimes as early as one year into the loan term.
Marina Cohen, a portfolio manager specializing in high-yield investments at Amundi SA, highlighted that private credit has traditionally been costlier and more restrictive for businesses. The current trend allows these companies to refinance under more advantageous conditions in the public market, intensifying the competition for private lenders.
The trend underscores a reversal of fortunes for Wall Street banks, which are reclaiming business from the private credit sector, a market that has seen rapid growth and currently stands at $1.7 trillion. With leveraged loan prices reaching their highest in nearly two years, banks are now in a position to offer more competitive rates than their direct lending counterparts.
Private lenders are feeling the pressure from this increased competition and are beginning to offer more attractive terms to retain their clientele. For instance, earlier in the year, Blackstone Inc. managed to secure a $250 million loan at a significantly reduced rate, marking one of the most competitive rates for a private credit loan to date.
However, not all companies can easily switch from private to public debt markets due to the longer process involved in syndicating a loan. Despite this, banks are adopting strategies similar to those of private lenders, such as offering delayed-draw term loans and payment-in-kind options, to win over clients.
The ongoing competition between public and private lenders is proving beneficial for buyout firms, which are capitalizing on the rivalry to negotiate better terms. Raphael Thuin of Tikehau Capital points out that the ability to choose between markets based on cost and conditions is a significant advantage for issuers, especially in a high-interest rate environment.
Concerns are growing, however, that the fierce competition for deals may lead to a dilution of standards and a potential disadvantage for investors, as noted by Barclays Plc analysts Bradley Rogoff and Corry Short. The race to capture market share could result in mispriced risks and a weakening of investor protections.
