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The BSL market's solid return has left many questioning how the future of private credit will look like — a hot topic at last week's SuperReturn International.

As several marketeers pointed out in Berlin, the return of BSL does not mean at all the end of private credit. The two are perfectly capable of co-existing.

Over the last few years, we've seen private credit grow to become a go-to for private equity sponsors in need of financing, confidently stealing market share from the retracting banks.

Closing record fund after record fund, record deal after record deal, private credit dominance seemed to have no end in sight…

… But this year, the syndicated market made a strong comeback and is now on a mission to win back market share.

As a result, private credit might be returning to its roots.

Back to the future — The revival of junior/senior structures

Once upon a time, before the explosion of private credit, before Covid-19, and before the retraction of BSL, a very young private credit made its first bold moves into the forest of loans providing junior/mezzanine debt alongside banks’ senior debt.

This week, we saw Cinven taking inspiration from the past, hoping to secure a junior PIK tranche in the private credit market for its ongoing €3bn acquisition of Spain's Idealista from EQT and Apex. This is expected to sit on top of a senior tranche done by local banks.

“We are definitely seeing private credit funds doing more PIK now that the BSL market is back so strong,” a debt advisor said.

A similar deal to Idealista currently in the market is One Equity Partners' British engineering firm Amey, where private credit lenders are being approached for a subordinated tranche, 9fin reported in April.

With a less than fruitful M&A market, and with a record-amount of dry powder sitting on the sidelines, these junior tranches might provide sweet relief for private credit.

"If you're a fund manager sitting on a slow pipeline and watching your best assets get refinanced away from you in the BSL market, you basically need to take what you can get right now,” a market source said.

Despite sponsors testing the market interest for junior tranches, not everyone is convinced this is a sustainable trend for private credit to actually keep thriving.

“I haven't done any deals like this, and I don't know any private credit funds that have actually done it — I'm not sure it's attractive for them,” a legal source said. “It's a good sign of cooperation and a good solution for sponsors; they get the best of both worlds.”

As with everything, private credit's willingness to take on junior tranches depends on the deal: “If it's a big jumbo buy-out or a particularly interesting credit, they might do junior tranches, or some HoldCo PIK. I think it will depend on the size of the deal,” the legal source continued.

Another hybrid model is also thrown into the mix. As we saw this week with the financing of UK testing firm Phenna, private credit lenders are also taking sterling tranches pari-passu to syndicated debt.

For Phenna's dual-tranche deal, the main £595m-equivalent euro TLB will go to the BSL market, while direct lenders will take the sterling TLB.

9fin reported on this emerging trend in March, where a large-cap lender told us: “Sponsors are most receptive to the hybrid idea when it’s a sterling/dollar or sterling/euro transaction. There’s still not a lot of depth in sterling.”

We've recently seen other pari-passu deals. Ambienta's acquisition of Italian Officine Maccaferri was supported by a hybrid financing between Pemberton and banks. Pemberton took 60% of the €300m+ package, while banks shared the rest.

However, hybrid deals don't mean the end of the rivalry between private credit and BSL.

A group of banks, including Goldman Sachs, is working on a syndicated debt package to challenge Aareon Group’s existing direct lenders, 9fin reported this week. In an attempt to dislodge KKR and Pemberton's incumbent debt, the banks are expected to price tightly — we're talking between E+350-375bps and a 99.5 OID, according to one banker.

In March, Advent International and Centerbridge Partners mandated Arma Partners to advise on the sale of the German property software firm, marketed off around €150m of EBITDA and €350m of annual revenue.

With Aareon looking shaky for incumbent lenders, this week still provided a win for private credit: Goldman Sachs is leading a club of lenders providing a debt package of around €1bn for the refinancing of Swiss Colosseum Dental Group. The €1bn debt package to Colosseum includes €100m of PIK.

The Colosseum deal proves that even though the BSL market is thriving and pricing significantly lower than its rival, going with private credit still has its perks. It's not all about the price: flexibility, including PIK tranches, is a key factor for sponsors opting for private credit.

“Direct lenders need to become more flexible, which will include doing more PIK,” a debt advisor said.

A legal source added: “The toggle feature in particular is very helpful for sponsors. It's one of the weapons private credit has to offer.

“It's not that long ago since the PIK toggle was really controversial, but I see it in the vast majority of deals I do now and I have for a while. It's not necessarily new, but the interest is high, so I think there's just been more focus on it lately.”

We saw the benefit of flexibility earlier this year when Goldman Sachs led the €1.5bn financing for fintech firm SumUp. With the company currently being in a phase of rapid growth, it needed lenders who could look beyond the numbers and provide the flexibility it needed to continue at the same speed.

“It’s definitely more compelling for firms like SumUp to go down the private credit road,” said a direct lender at the time. “They're thinking about the flexibility for the capital instead of just the cheapest.”

This week we have seen several processes moving forward, with several additions to our weekly European private credit pipeline. In addition to the processes already mentioned, new entrants include the final bidders for Five Arrows' Global D, Bregal Milestone 's sale of Italian fintech firm Epipoli and private credit maxing out leverage for emergency software provider F24.

For the full run down on all the in-market deals in our pipeline, please email subscriptions@9fin.com.

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