But, “There is no market for private credit secondary paper,” I hear you cry. True, and as far as 9fin sources were aware, this is the first time that a CLO has bought private credit paper in the secondary market.

However, private credit funds have nonetheless been known to buy and sell private credit paper between themselves, according to two banking sources. 

“Prior to the [aforementioned] CLO trade, all we’ve ever seen is direct lending funds extending their loan then selling down snippets of paper to other direct lending funds,” said one of the banking sources.

The second banking source elaborated on the mechanics. 

“On the original term sheet between lender and sponsor there will be a white list which effectively limits the loan’s ownership to one lender,” they said. “This would have to be amended to include another lender. You go to the sponsor, make an amendment, get a trade done.”

According to both sources, a trade in secondary paper is win-win.

“It makes the sponsor happy as they prefer lender diversification,” said the first source. “For the private credit fund, it gives them some valuable liquidity in an otherwise illiquid asset class.”

A sale to a CLO is interesting, however, as the CLO is now burdened with illiquid paper for which it may not find a buyer. Notwithstanding this one trade, there is no real private credit secondary market, and no price discovery. This, however, could change. 

JP Morgan and Goldman Sachs have been reported in the press as keen to set up a secondary market trading desk for private credit.

“We believe a secondary market in private credit will develop,” the second banking source, who is close to one of the above-mentioned banks, told 9fin. 

Other banks are keen to join. 

“Everyone wants to broker a secondary market private credit trade,” said the first source.

The sources did not name the credit that traded. However, according to 9fin’s private credit database, there are only a handful of private credit loans over €/£1bn in total: Envirotainer, Dechra, April Group, RSK, Ingenico, The Access Group, Corden Pharma and Ardonagh. It is not the recent Constantia Flexibles, said one of the banking sources. 

In anticipation of the banking resurrection

As September approaches, all eyes turn to the upcoming Worldpay syndication. 

“If the deal gets away and gets done nicely, then that’s it. That’s a massive boost in confidence to underwriters and it paves the way for more syndication,” said a direct lending source. 

The payments processor is heading back into private equity hands financed by $8.4bn of funded debt and a $1bn revolving credit facility, as reported by 9fin. A bond and loan package led by JP Morgan and Goldman Sachs is expected to take out the bridge financing and may be split between euros and dollars.

“The sponsor wants to see size, certainty and price, which is why you got [upwards of £1bn private credit deals] like Dechra,” said a direct lending source. “But then you see a large public-to-private deal like Software AG going the syndicated route and you look at the Western European Leveraged Loans Index’s comparatively attractive yield for TLB and you can see the argument for syndicated gets stronger.”

“Worldpay will be a barometer,” the source concluded. 

Worldpay, if successful, will not be the only headwind for private credit hoping to participate in syndicated deals. The EU regulation on alternative investment funds, the AIFMD, is another. As 9fin reported earlier today, AIFMD proposals to cap leverage on loan-originating funds could hurt private credit funds participating in the syndicated market. 

Not a problem for most direct lending funds which may only take one turn of extra leverage at a fund level, but could be a problem for those that play in the comparatively lower-priced syndicated markets. These funds, like Apollo or Park Square, may need an extra turn or two of leverage at fund level to at once take syndicated positions at 4% and continue to generate double digit returns for their investors. However, the proposed AIFMD cap runs as low as 150%.

Lender designation in the spotlight again

Lender designation, whereby private equity sponsors and their advisors appoint legal counsel for lenders, is due to face scrutiny from the International Organisation of Securities Commissions (IOSCO) in the coming weeks, 9fin has reported.

The international regulator has investigated the practice for several months, with support from national bodies like the Financial Conduct Authority (FCA), and will soon launch a consultation report.

However, the important point to consider is whether LPs will soon start asking questions of private credit fund managers. Are their deals safe from designation, or not? For if the sponsor chooses the lenders’ counsel, then there are fears over whether that counsel can adequately represent the lenders’ interests. 

Direct lenders speaking to 9fin said workarounds to lender designation included presenting a list of three law firms to the sponsor, from which the sponsor chooses one, or employing their own legal counsel for an ‘over-the-shoulder’ look. 

Also this week…

The Bank of England has warned on UK companies’ vulnerability to higher interest rates — although the BoE claims that we’re not quite at the global financial crisis or Dotcom crash level yet.

“It would take a further upward shock to borrowing costs of over 200 basis points and 800 basis points respectively — on top of the increases already expected — to reach GFC and Dotcom shares of low interest coverage ratio (ICR) firms,” the bank said.

But, in better news, a private debt index by law firm Proskauer showed default rates dropping to 1.64% in the second quarter of 2023, after two consecutive quarters of increases.

Private credit fund Pemberton Asset Management is providing just over £100m of debt to support sponsor Carlyle’s acquisition of Evolution Funding. Based in the UK, Evolution Funding connects car dealers and auto finance providers with multiple lenders. Calculated off an EBITDA of over £25m, the leverage on the deal would be implied at around 4x, 9fin reported. 

Epiris, which acquired Pure Cremation, a UK no-frills funeral service, is fending off private credit pitches to fund the acquisition, 9fin reported. The debt packages are as large as £80m, based off an EBITDA of between £15-20m. Unusually, the Epiris acquisition was carried out as an all-equity transaction. 

And Rhone Capital and KPS are interested in sustainable barrier packaging business Ipackchem, with final offers due in September, 9fin reported. Ipackchem is up for sale only two years after US sponsor SK Capital bought the business in 2021. Goldman Sachs is mandated as M&A adviser on the deal, as previously reported by 9fin.