DealCatalyst wrap — Private credit blurs into BSL, secondary market, and regulation


Market Wrap

DealCatalyst wrap — Private credit blurs into BSL, secondary market, and regulation

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  1. Fin Strathern
5 min read

DealCatalyst’s European Direct Lending & Middle Market Finance Event wrapped up in London yesterday, and aside from being gobsmacked at The Landmark venue’s architecture and gobbling up some of the best conference food we’ve ever eaten — shout out the tomato tortellini — the 9fin team digested a few key takeaways.

Private credit vs broadly syndicated

Given the January timing, outlook for 2024 was expectantly hot on everyone’s lips, and anticipation over how private credit and broadly syndicated markets will interact with one another this year was a constant talking point.

There was strong consensus from speakers and attendees that direct lending’s past 18-month dominance of debt markets, spurred on by a slowdown in the syndicated space, is in its twilight.

A pre-panel audience poll showed that 70% of attendees expect the syndicated market to claw back market share from private debt this year.

What’s more, direct lenders expect the two markets to converge — a “blending of the edges” of what it means to be broadly syndicated, as a first panellist put it. Narrowly syndicated, if you will.

“I think we’ll see dual-tracks being run permanently,” said a second speaker. “With situations where there will be hybrid deals with banks and direct lenders co-investing in the same structure.”

In the large-cap space, panellists suggested that this is already starting to take form.

“Dual-track is creating more of a hybrid market,” added a third speaker. “With multi-billion euro deals especially, it increasingly looks like one market.”

9fin explored this trend earlier in January, as bankers expect large-cap private credit deals to return to syndicated markets for refinancing in 2024. The idea of market convergence raises obvious anxieties for direct lenders, uncertain of their role in a blurry new world after years of being the clear-cut choice.

A fourth speaker said they expect such a development to lead to a “resurgence of subordinated capital” this year — an emerging trend 9fin dived into last November that would give direct lending a designated seat in the capital structure.

“We’re seeing a lot of pipeline in junior debt, and it’s one of the ways direct lending can effectively merge with BSL markets,” they added.

Private credit’s nascent secondary market

Growing chatter in recent months around private credit’s formative secondary market didn’t manage to elude the conference.

As one speaker put it: “When you are seeing these really large $4-5bn unitranches with 20-25 direct lenders in it, at some point you have to think someone is going to start market-making on those tranches.”

“And at the other end, for holders on these large deals with a 2-3% stake, surely they would like to see some secondary trading liquidity,” they added.

Panellists agreed, with another suggesting that it may not be sustainable in the long-term for private credit funds to keep doing such large transactions without a secondary market to sell down into.

So why has progress seemed slow in this area, given the appetite?

A third panellist noted that limited deal flow for the past 12 months has meant everyone is short of origination, leaving little room to sell down until portfolios are fuller.

“Until we solve the supply-demand imbalance, I think liquidity in a secondary market is going to be hard to realise because everyone is focused on being invested right now,” they said.

Discussions with event attendees revealed further insights as to some of the roadblocks on the path to a functioning private credit secondary market, chief among which was a lack of information transparency and concerns over ticket size.

“It raises a lot of issues,” one attendee said. “Because if you want to shift part of your position, chances are you want to shift all of it, which then raises questions as to the quality of the credit.”

9fin noted at present that the primary large-cap space in Europe is dominated by 10 or so funds, with selldowns happening piecemeal to smaller private credit funds unable to write the original large ticket to participate in the primary financing. 

These deals leave the original ticket holder unable to shift its entire position — and, according to participants, this looks unlikely to change for now. 

“There’s also the fact that no CLO is going to take €200m on a given name, so for now I think it’s a bit of a leap that you would be able to find a counterparty to take you out of your position on large ticket sizes,” they added. “I think it is coming but it’s going to take time.”

Financial stability — a BoE warning?

Given the speed with which private credit has grown since the global financial crisis, it should come as no surprise that some feel industry regulation has failed to keep apace with the market’s rapid expansion.

As the asset class continues to mature, regulators seem keen to engage more with market participants for better access to reliable data, improving their ability to monitor risk.

As part of this effort, Lee Foulger, who heads up the Bank of England’s financial stability strategy and risk department, gave a keynote at the event shedding some insight on how the central bank looks at risk in private credit and the ways it ties into wider financial stability.

It comes at a time of increased media attention around potential regulatory measures facing private credit, especially in regard to leverage levels and the opaqueness of the market.

During his talk, Foulger highlighted that rising interest rates have spurred on certain practices that are increasing market risk.

“Amend and extend is increasingly common, in which lenders agree to push back a loan’s maturity, often in return for a higher yield and tighter financial controls,” he said. “Payment-in-kind practices are also becoming increasingly common, where borrowers with low liquidity issue new debt in order to meet interest payments.”

“These measures can help to smooth the impact of tighter financial conditions. While individually rational, they put a premium on robust approaches to risk management and collectively could increase the risk of defaults materialising further down the road,” he finished.

That’s a wrap

Discussions from the event also emphasised ESG’s increased importance for European investors as restrictions become tighter and ESG decisions become more black and white.

Several speakers also spoke favourably of Asia as the next big growth opportunity for private credit in the medium-term, with funds pouring increasing resources into expanding their presence in the region.

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