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Taking the Credit — Margin spreads and losing our heads
Josie Shillito
+Synne Johnsson
•4 min read
Large-cap private credit funds are repricing as many of their deals as possible at the request of their sponsors, and the squeeze is felt all the way down into the lower mid-market, according to 9fin sources.
This week, 9fin reported the private debt repricing of Silverlake-owned Italian tech platform Facile, down by 100bps. More details on the debt package and final pricing available for 9fin clients here. However, Facile is by no means alone. Large-cap private credit funds (focusing on deals over €50m EBITDA) polled by 9fin are spending much of their time on this activity, and, interestingly, prices are creeping down to a four handle.
“We were super busy with repricings in January,” said one direct lender at a large-cap private credit fund. “In one instance, we’ve repriced from mid 500bps [over the base rate] to mid 400bps. However in some other cases, we have gone as low as 400bps.”
9fin’s graphic, below, shows the downwards slope of both private credit and BSL pricing from Q1 2023 to present.
Interestingly, the trajectories of private credit margins (sub and above €50m EBITDA) have maintained a roughly 200bps spread to BSL over this period, showing the premium that sponsors have, until now, been willing to pay for the relatively more expensive private credit option.
What this chart does not show is a full dataset for Q1 2024. Thus far in the quarter, however, average print on BSL loans across single B and double B this year is Euribor+388bps, according to 9fin analysis.
Anecdotally, primary LBO large-cap private credit margins on offer this quarter are ducking as low as Sonia+500bps (see IRIS Software here), or repriced to this level (hello, Facile), indicating a narrowing spread of 110bps to BSL.
We still have March left to run in Q1. If we get concrete confirmation of private credit repricings to a four handle, say, E+450bps, then the spread to BSL slims down to 60-70bps.
So far, in Q1, refinancings of private credit debt into BSL have been driven by price, according to 9fin sources. The credits that have launched syndicated debt to take out private credit debt, such as French insurance group, April, have a long history in the syndicated markets.
Q1 BSL refinancings of private credit debt
But, if the private credit premium narrows to 60bps-70bps does this even warrant a refinancing in the BSL market?
“You’ve also got to take into account the underwriting fee, the OID and any soft-call premium to pay on the private credit loan,” said a large-cap direct lending source.
Although, the recent group.One refinancing priced at par, so no OID for them.
The other element is that no every large-cap private credit deal is suited to the syndicated market. Looking at Europe’s largest private credit deal before the take private of online advertiser Adevinta, the £2.3bn unitranche refinancing UK software business The Access Group, priced at S+575 bps. Denominated in sterling, highly acquisitive, with already comparatively low pricing, is it a candidate for a BSL refi?
Highly acquisitive businesses tend to find private credit more suitable to their needs. Access Group sponsors HG Capital and TA Associatesalready raised a £500m add-on tranche in April 2023, offered at S+675bps and may well need to raise more.
“Companies that need large committed lines for acquisitions and capex don’t really want to go to the BSL market,” said a banking source, “it’s too much trouble to raise extra debt adhoc that way.”
However, for every Access Group, there are many more that do make good candidates. Currently set to launch a new private credit to BSL refinancing is a company whose private credit debt is priced at only E+575bps. Watch this space.
Some interesting insights from debt advisory Lincoln International showed through data what we’ve been hearing anecdotally: that covenant breaches in middle market private equity-backed companies are still fended off by proactive covenant amendments.
According to the group’s Fourth Quarter European Valuation Insights report, almost 18% of all companies Lincoln values have sought covenant amendments. As a result, covenant breaches are declining despite the worsening macroeconomic backdrop.
“Global covenant breaches decreased from 3.9% in Q3 2023 to 3.4% in Q4, well below the COVID era peak of 9.4%,” according to Lincoln.
The overall decline in breaches demonstrates that borrowers and lenders have been proactively dealing with any potential defaults, given the higher interest rate environment, to paraphrase Lincoln.
As well, the most common amendments related to pricing (cash and Payment-In-Kind (PIK)), followed by sponsor equity infusions, maturity extensions and covenant holidays. Within pricing, the use of PIK increased to 60% of amendments in Q4 23 from 22% in Q3.
The question is when the wheels will come off. This is too big a subject to be addressed in a footnote, but equity injections and covenant amendments can’t continue forever. For many debt advisors, the bolts have to come off in the form of lenders taking the keys or forced sales before this year is out.
European private credit pipeline
This week has seen process kick off across France, the Netherlands, the Nordics and the UK with advisors finally appointed, lender educations scheduled and IMs landing.
