Cinven followed a similar attempt by One Equity Partners, which was approaching direct lenders to take a subordinated tranche for its sale of UK infrastructure firm Amey, on which 9fin reported in April.

Amit Bahri, co-head of European direct lending at Goldman Sachs, saw this coming, telling 9fin in March that “the senior/junior split will be one of the dominant structures of 2024.”

Sponsor attempts at securing senior debt in the public market and junior debt in the private market are becoming increasingly visible, market sources say, but whether direct lenders are willing to go back in time is less certain.

Although private credit lenders need to deploy (enough has been said about the record amount of dry powder), these junior tranches aren’t necessarily big enough for larger funds.

John Anderson, partner at Goodwin, said funds might have reasons other than capital deployment to engage in junior debt. “The megafunds might play into that space to remain relevant — kind of like taking an information piece of a deal, so you can say you were involved — but they would probably normally want to take the entire thing,” he said.

Another lawyer concurs, noting that fund managers may choose to invest in junior debt for relationship reasons.

The amount of leverage is clearly also a determining factor as to whether there is even space for junior debt in a capital structure. “If it’s the ordinary 60-70% leverage, I don’t think it’s that attractive,” according to a direct lender. “You’re the first to lose your money and most funds would have a certain level of security promised to their LPs, making junior at those levels tricky.”

For sponsors looking to maximise leverage on their deals, or if they’re trying to finance a fast-growing company, a senior/junior hybrid structure makes sense. However with interest rates as high as they are, it is not always worth the extra leverage.

An official at a private equity firm said: “Some sponsors would definitely look into junior/senior, but it would mostly be if you’re looking at the spicier assets, or if they’re growing very rapidly and you need more leverage than the public market can offer.”

But for a vanilla large-cap asset, the approach does not always work, the official added. That’s because junior debt does not move the needle enough to justify the price. “It’s better to just put in a bit more equity yourself,” they said.

PIK? Where we’re going, we need PIK

Clearly there is an appetite for more leverage on certain deals, but if junior debt is too expensive then there is a solution in the form of one of private credit's key weapons: the PIK. As we saw with Cinven's Idealista, sponsors are seeking a junior PIK tranche to complement a senior syndicated loan.

“All private credit deals are PIK now, whether it's junior or senior secured,” said an origination source.

A lawyer added: “There's an increased focus on it now that interest rates are so high, so it's very attractive for buyers.”

The syndicated loan market is cheaper, but it does not offer the same flexibility as private credit does, and PIK is one way for private credit to get the upper hand on certain deals, despite the steeper price tag.

The same lawyer said: “It's not that long ago since the PIK toggle was quite controversial, but I see them in the vast majority of [private credit] deals I do now and I have for a while.”

According to a sellsider, some banks are prepared to underwrite PIK debt in private credit transactions, although the field for this is limited. “You can get 12-15 banks offering term sheets on regular senior debt, but you’ll only get three or four on PIK,” the sellsider said.

Here are the private credit deals that have come to market this year with a PIK component.

Riding shotgun in the DeLorean

Alongside the return of the senior/junior hybrid tranche, a second hybrid structure has emerged of late in the form of pari passu tranches denominated in different currencies.

UK-based testing firm Phenna Group recently approached private credit lenders for a £250m sterling tranche pari passu to the syndicated £595m-equivalent euro TLB, 9fin reported earlier this month. We also saw Norgine’s multi-currency deal tap both sides of the aisle back in April.

Motor Fuel Group also flirted with the idea, inviting private credit players to pitch for the sterling tranche, before it eventually got done in the syndicated markets.

Goodwin's Anderson said: “The pari passu arrangement is a whole new twist to everything. I think the FX thing is what makes it special, because if it was all in the same currency, I wouldn't see the point — the currency gave it the special sauce.”

Public sterling tranches can be difficult to allocate in the syndicated loan market because the CLO market finds these assets less appealing (CLO liabilities are denominated in euros). This was a theme in our preview for UK-based catering and hospitality group WSH Investments.

Again, this is where private credit can step in.

However, not everyone is fully convinced that pari passu offers private credit lenders the premium they require.

A lawyer said: “If it's truly pari passu, there's no additional insolvency risk, so there's no compensation for that. I think it would just depend on the size of the deal. For most clients, I don't think they would get excited about this opportunity unless it's a very big deal.”

Hitting 88mph and getting bigger deals

Hybrid deals are not new, rather they provide a window into how the private credit market used to operate.

Rising from the ashes of the global financial crisis, private credit's first foray into the corporate-lending world was through junior loans on top of increasingly conservative senior bank loans.

Reminiscing, Anderson said: “It worked very well, it was compensatory, it was lucrative — it was a good return profile for the sub-debt lenders coming in to fill that last bit.”

The sharp rally in syndicated loans has shifted the market back to a place where some sponsors are taking inspiration from the past, bringing back the senior/junior hybrid, like we have seen with both Amey and Idealista.

Anderson continued: “I think as interest rates taper down — we are already seeing cheaper pricing — the market will open up to doing these somewhat bigger deals. The [junior/senior] market will come back and people are going to love it.”