As private credit has muscled its way into leveraged finance, it has long been thought that this new challenger would poach business from traditional leveraged loan investors.
CLOs stand to be most affected by private credit’s ascent, as CLOs and their warehouse facilities own a commanding share of leveraged loans.
With long-term bank lending in retreat after the financial crisis, private credit lenders have gobbled up middle market debt. Having raised huge sums of capital, these lenders are now able to cater to the larger borrowers generally found in the broadly syndicated loan market.
While private credit first appeared on BSL turf in the US, the sector is expanding rapaciously in Europe and could, according to Carlyle, grow from $530bn today to $940bn by 2030.
In Europe, private equity firms seeking financing for leveraged buyouts now often approach both arranging banks in the BSL market and private credit shops.
It would seem logical for the BSL and private credit markets to be locked in mortal combat over the same borrowers.
But many asset managers play in both markets, as BSL lenders through instruments like CLOs and private credit providers. A borrower lost by one part of the business is a potential client for another part.
Borrowers have different motivations for choosing private credit and BSLs and the respective markets can funnel business to one another. Private credit can accept higher leverage, but demands fatter pricing.
With BSLs, borrowers get keener spreads and more liquidity, in return for stricter limits on leverage and fewer guarantees around execution.
Borrowers with too much leverage to refinance their debt in the BSL market can sometimes do so with private credit. Conversely, high-performing borrowers in the private credit sector can refinance more cheaply by issuing BSLs.
BSL default rates have, in fact, been kept lower precisely because BSL borrowers could refinance through private credit.
Private credit offers borrowers an alternative to BSLs, but should not always be thought of as a rival.
As the two markets become intertwined, a greater concern for leveraged loan investors should be whether they can hold the loan on underwriting, or be forced to adopt the more flexible underwriting standards of private credit.