(Bloomberg) --Investment banks including Goldman Sachs Group, Citigroup and Barclays are seeking to poach back leveraged finance deals that were snapped up by direct lenders when markets were more volatile, according to people with knowledge of the matter.
Bankers in Europe and the U.S. are speaking with buyout firms about private credit loans that were signed when credit spreads were blowing out and banks were preoccupied with hung debt on their balance sheets, the people said. Now that leveraged loan markets have calmed down — and interest rate cuts are on the horizon — they want to get some of the business back.
Banks are actively pitching to refinance the €850 million ($924 million) unitranche that backed KKR's buyout of French insurance broker April Group, as well as the €500 million unitranche backing EQT AB's buyout of calibration services firm Trescal, people familiar with the matter told Bloomberg.
Other deals potentially of interest to banks are those behind the buyouts of baker Irca SpA and Italian pharmaceutical company Neopharmed Gentili SpA, a separate person said. KKR, EQT, Irca owner Advent Group and Neopharmed owners Ardian and NB Renaissance declined to comment.
Investment banks have an opening now because private credit unitranche loans typically allow companies to refinance around 12-18 months after a deal is first priced without a steep charge. At the same time, falling borrowing costs in the leveraged finance market means they may be able to offer cheaper deals than direct lenders, as well as more flexibility in the form of fewer covenants.
Private equity firm Veritas Capital has already taken the plunge, and is seeking to refinance existing unitranche debt that it used for the buyout of Wood Mackenzie with a $1.3 billion leveraged loan.
Cheaper Debt
As the syndicated market normalizes, some of the larger private credit deals that were done years ago "are likely to be refinanced with cheaper syndicated debt," said Osvaldo Pereira, head of direct lending at Park Square Capital. Still, it's "too simplistic" to assume that borrowers will choose syndicated loans simply because they are available again — "there are sponsors and borrowers who will continue to prefer a private credit solution," he said.
Banks are particularly targeting borrowers which priced debt between March and December 2022, when credit risk for European junk firms surged to the highest level since the coronavirus pandemic and direct lenders scooped up market share. They're also targeting middle-market private credit borrowers that have since become large enough to succeed in syndicated markets.
Spokespeople for Goldman and Barclays declined to comment. Citi didn't respond to a request for comment.
For borrowers, refinancing with investment banks may make sense. While private credit offered the certainty of getting a transaction done in the tumultuous market of 2022, many of those deals now look expensive. Refinancing in the syndicated market is now 75 basis points cheaper than the unitranche alternative, while financing for new M&A is 100 basis points cheaper, according to bankers.
Still, it's unclear how much business banks will be able to win back. The incumbent direct lenders also have the right to pitch a repricing to the borrower, and may offer lower rates, higher leverage or undrawn acquisition lines to keep hold of a deal.
Sweeter Terms
In the US, private lenders led by Blackstone Inc. recently
More generally, private credit firms have been slashing their pricing to win deals. Direct lenders including Apollo Global Management and Goldman Sachs Asset Management
There are other speed bumps.
The European Central Bank's guidelines indicate that banks should generally limit leverage on deals to six times, while direct lenders remain largely unregulated and can push leverage to more aggressive levels. Some borrowers may also be dissuaded by the expense of getting an official rating from a credit-rating agency — something that direct lenders don't require.
And there are also geographical nuances. Direct lending deals done in sterling may be harder to refinance with banks, given the lack of liquidity in that currency in syndicated markets. And refinancing deals backing Italian companies would require banks to issue floating-rate notes because of strict regulations around leveraged loans in the country.
Another complicating factor is that many banks including Morgan Stanley and HSBC are building out direct lending operations
"Banks have started to win back some deals and pull back market share from the direct lenders," said Jeremy Duffy, partner and head of EMEA bank lending team at White & Case. Still, "I'm not sure that at this stage bank refinancings and some new money deals alone are keeping direct lenders awake at night," he said.
