That said, on Friday morning, MFG announced a big upsize to its syndicated deal to £1.18bn, with a £750m distributed sterling tranche — so this assumption might be changing.

The recap of UK HR software business Zellis at the end of last year included a mix of private credit and BSL lenders, while the debt to back its upcoming sale will likely include both.

Meanwhile, the refinancing of IRIS Software, pursuing talks with both BSL and direct lenders, could result in a hybrid transaction due to the company’s sterling exposure.

Large-cap fund investors have been clear that they want to work with rather than against syndicating banks. For sponsors, interest rate pressures and the flexibility of delayed draw facilities make private debt attractive, while the cost advantages of the syndicated market are obvious.

Different flavours of hybrid

Hybrid deals are taking two forms — a deal like Ardonagh, where private credit commitments rank pari passuwith the publicly traded debt, or something that harks back to a previous, post-GFC, pre-unitranche era, where the deal will be structured senior/junior with the junior financing provided by private credit funds.

The latter allows private credit to stay true(er) to its nature, resting in a non-fungible tranche, with different terms to those of the syndicated debt. The junior debt can be structured with a PIK toggle, solving the pressures of cash-pay interest, with the junior slice allowing the total debt quantum to reach the size needed to support the enterprise value of the LBO it backs.

“Syndicated debt may get to 5x where the enterprise value is 15x, so the private debt can add two or three turns to that debt quantum,” a market participant in levfin origination told 9fin.

These types of structures are familiar from an earlier age. Prior to the broad adoption of ‘mega’ unitranche financing in 2014 onwards, a syndicated senior loan with pre-placed junior debt was fairly standard in syndicated deals. However, leverage requirements means there’s a place for it in the current environment too.

“The [senior/junior] will be one of the dominant structures of 2024,” Amit Bahri, co-head of European direct lending at Goldman Sachs, told 9fin.

Newer to the market is the participation of private debt pari passu to syndicated loans and syndicated bonds. In this kind of structure, it is only the pricing of the private debt tranche that marks it out from the more liquid tranche sold to CLOs.

In the original incarnation of MFG deal, for example, a £800m-equivalent TLB denominated in both euros and sterling was on offer, with price talk on the euro at E+450-475bps at 99, and guidance on the sterling at around S+575-600bps at 98.

A strong response has allowed left lead BNP Paribas to boost the offering size to £1.18bn, with revised talk of 400bps at 99-99.5 for the €500m euros and S+575bps at 98-98.5 for the £750m sterling.

“Sterling appeals to private credit,” explained a syndicated banker close to the deal, while a second large-cap private credit fund talking to 9fin deemed the sterling pricing “attractive.”

Unlike the Ardonagh deal, which has ringfenced $3bn for private credit debt, the MFG capital structure has drawn no such delineation in its TLB — as demonstrated by the decision to upsize on 1 March. Similarly, other deals with a mix of private credit and CLO investors have not necessarily distinguished these with separate tranches. Is a private credit bookbuild becoming common?

“I wouldn’t call [these things] a formal bookbuild,” said Bahri.

The syndicated banker added that in these hybrid deals, “it’s a type of bookbuild where tranches are offered to all investors.”

Blurred lines

A hybrid deal where private and public debt ranks pari passu blurs the lines between investors. Normally, a non-fungible debt tranche is subject to its own deal documentation, which may include covenants, stricter reporting requirements and longer non-call and soft-call periods than the TLB docs for the tranche offered to CLOs.

However, this is not the case where a deal is pari passu. “Broadly the documents are the same, but economics are directly negotiated with the direct lender and not via the bank route,” said Bahri.

For large-cap private credit funds, CLO-friendly documents do not represent much of a departure from the terms on which they do large-cap private credit-only deals, such as EQT’s 2023 take private of pharmaceutical products manufacturer, Dechra, for which the debt came without a covenant. In these cases, the line trotted out is that it’s worth it for a ‘good’ credit and when part of a diversified portfolio.

The same line comes out when private credit funds have to mark their positions. In a deal with publicly traded debt, the risk is that the leveraged loans or high-yield bonds can trade below par.

For some funds this is not a problem. “If there’s a reference security that is traded you will almost certainly have to mark at the same price or spread to that security,” said a second large-cap private credit fund to 9fin. “Can’t see why you wouldn’t. We are fine with that additional volatility when we think something is good credit risk in a public structure.”

If private credit is ranked pari passu, then it becomes very hard for the private funds to convince their LPs that the debt valuations they make for their own funds should not follow suit. For many, their independent third party valuations take into consideration how a reference security is performing.

This issue of uncorrelated private credit valuations was pushed into the press this week (commencing 26 February), and 9fin also wrote about this last summer, here.

A greater number of hybrid deals could create greater trust in private credit valuations by forcing them into a benchmark. However, this would apply only to large-cap deals that have that crucial interplay with publicly traded debt. (And those smaller private credit funds that buy tranches from them on the secondary market, see 9fin’s secondary market analysis).

How big is too big?

It seems like BSL is having a resurgence in large-cap deals, with private credit still governing the middle market LBO territory of €50m EBITDA and under. But private credit deals like the the €4.5bn debt backing Blackstone and Permira’s take private of Oslo-listed online advertiser Adevinta in 2023 reminds us that there could also be an inflexion point where a deal is too big for BSL.

“I’d say €2bn is the syndicated limit for a pure deal in euros,” said the first large-cap private credit fund. “More than that and you need to look at euro/dollar. But €10bn is possible in a pure private credit deal.”

Ardonagh was originally a $5bn private credit deal, scaled back to $3bn with the entry of $2bn of bonds. Although private credit was willing to stump up the cash to the tune of $5bn, it appears it too had an inflexion point.

“My instinct is that a lot of the private credit funds in the name were happy to take money off the table with the bond deal coming together,” said the second large-cap private credit fund.

For hybrid BSL/private credit, the public market component needs to be significant, added the first source. “It needs to be large to be truly liquid and to work for CLOs.”

So size matters, and a pure euro deal will test the depth of both private credit and BSL markets. For now, however, liquidity reigns.

“It’s about liquidity,” said Bahri. “The depth of the bond market still has to be tested. If you can tap both public and private credit markets as a borrower you can significantly de-risk.”

European private credit pipeline

For the full run down of the pipeline, please email subscriptions@9fin.com.

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