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Private Credit 

Josie Shillito

Private credit opportunities slipping through our fingers and into the leveraged loans universe seems to be the flavour of 2024 so far, with former private credit candidate IRIS Software sticking with its syndicated package following the acquisition of a co-controlling stake by US sponsor Leonard Green & Partners in December 2023. 

Stateside, Cotiviti is probably taking its $5bn debt to the syndicated markets and in Europe, at least one other former private credit opportunity in the Nordics is set to launch at the end of January as a syndicated transaction.

But market participants are also talking about a great 2024 refinancing opportunity, from private credit into BSL. Let’s take a closer look.

As we wrote this week, both bankers and private credit funds are thrashing it out about the market’s direction on this, with bankers convinced that many of the past few years’ private credit financings will take advantage of reopened markets to refinance in the BSL market this year. 

To quote from the piece, “The spread differential is high enough that the trade will make sense. You're talking about companies that have been upgraded to the point where the BSL (broadly syndicated loan) market will take them, having crossed the €100m EBITDA threshold.”

It makes sense from a price perspective. If you look at the prospective pricing on IRIS Software’s planned private credit package, it was a full 125bps over the UK software business’s current leveraged loans — and that’s without taking into account the OID that would have been awarded at issuance. On a credit that had a supportive syndicate and a strong track record, was private credit worth it? IRIS sponsors Hg, ICG and LGP clearly decided not.

But are there enough candidates for a BSL refi? IRIS Software is a bit of a rarity, both in its size and in its syndicated track record. To paraphrase one of the private credit views in the article, you’re relying on a deal having previously been in the syndicated market for a long time, with a good history and well-known amongst prospective buysiders. 

Looking at deals done 2021 onwards, and therefore outside their non-call and soft-call periods, there aren’t many such candidates: private deals with a strong track record in the syndicated markets and potential to be upgraded into the single B space.

“2021 was not exactly the year for high-quality deals,” conceded a private credit source. 

Size, too, will limit the flow. To access the BSL markets, EBITDA needs to be close to €100m EBITDA. The pool of deals in 9fin’s private credit database done before 2023 and therefore potentially outside their call periods becomes rather shallow at this size.

However, we are talking about EBITDA at issuance. There are many more done before 2023 at €30m EBITDA that could, of course, now be over €100m EBITDA. 

Looking at deals done in late 2022 onwards, and there’s a marked size uptick. Business management software provider Access Group, for example, was the largest private credit deal in Europe ever, until online advertiser Adevintacame along in December 2023. Depending on what was agreed, Access could be outside its call period even now, and it has a very short MFN. 

But it’s extremely acquisitive, adding on a £500m tranche as recently as spring 2023 for financing acquisitions. It’s this super-growth where private credit can come into its own and edge out the BSL competition, where a broad lending group may not want to upsize every year or so.

Later in 2023 we get some more larger, high-quality deals in the private credit space. In fact, they skewed average ticket sizes in private credit quite substantially, see 9fin’s Q3 analysis. But these will not be eligible for refinancing for a while yet, unless the issuer pays substantial make-whole premiums or call fees. 

As a direct lender concluded in the piece, “I think it’s a bit too soon for [existing] private credit deals to return to syndicated markets this year. The syndicated market won’t be sufficiently cheap to warrant it. I expect companies to crack on and wait till 2025 or 2026 to refinance.”

For primary LBOs coming to market, however — all bets are off.

European private credit pipeline is 85% LBOs

On that note, there are a lot of LBOs in the European private credit pipeline. The proportion of LBOs as a use of proceeds is 85% as of our pipeline published 5 January. 

We don’t have the full-year numbers in quite yet for 2023, but for illustrative purposes, LBOs as a share of the large-cap deal count dropped from 33% in Q2 2023 to 6% in Q3 2023, and as a share of of middle market (under €50m EBITDA) LBOs accounted for just over 50% in Q3 2023. 

Of course, there is a difference between closed deals and pipeline deals, and we’re not comparing like-for-like timeframes yet, but the 85% LBO figure in the 2024 pipeline so far is certainly indicative of M&A confidence.

Another superb observation made in our pipeline analysis concerns sectors. While 2023 was dominated by tech and healthcare deals, our pipeline for 2024 deals so far tells a very different story. Of the sectors looking for private credit, consumer discretionary is third after tech and industrials, representing 17.5% of tracked deals. 

As Chris Smith of advisory Clearwater International observed in our 2024 private credit outlook “We’ve seen some leisure businesses now, some travel businesses, gym groups. All these businesses have been incredibly resilient. But what is particularly remarkable is that lenders are again considering consumer deals. Particularly experiential or health-related consumer.”

Click here for the full named and detailed list of details, or subscribe to 9fin Private Credit by emailing subscriptions@9fin.com.

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