Yet it may be more of a maturity fence than a maturity wall, as research from KBRA published Wednesday concludes. The ratings agency found that as little as 10% of middle market private credit portfolio companies have either a maturity in ‘24 or ‘25. It’s below the 16% for the large cap direct lending market.

Furthermore, the BDCs, a public window into the private credit market, show a little higher figure of 14%, but still below 16%.

“There is no immediate wave of maturities coming to the private credit/direct lending market,” the report proclaimed.

Fundamentally, it comes down to Fed policy. The dovish turn signaled last month may turbocharge M&A activity again. As 9fin noted late last month in an outlook piece, there is much to be optimistic about for next year. With rates unlikely to go any higher, there is a certainty in the debt costs to private equity-backed borrowers, whereas previous uncertainty had helped to stymie deal flow.

And we come to the one of the first deals out of the blocks this year: Pegasus Steel. Acquired in June by Arlington Capital Partners with all equity, the company is now entering the debt markets in a more settled environment. A merger with peer Merrill Technologies Group means the marketed EBITDA is roughly $50m. 

Citizens Bank underwrote the debt deal and is now looking for buyers. Leverage is at 4.5x totaling $225m. At a spread of SOFR+550bps and a 98 OID, it’s attracted quite a diverse buyer base. Syndicated vibes, perhaps.

Entire equity underwrites were seldom seen last year, despite the case making sense (listen here for a wider discussion on Cloud9fin). It’s a bet that rates would come down and that may be paying off, which may lure other sponsors who circumvented obtaining debt. And poof! There is the fire for M&A activity to pick up. And another removal of a brick in the maturity wall.

Out of office

Perhaps you missed another big story of 2023 — that office real estate is facing quite a crisis.

The real estate 2024 and 2025 maturity wall numbers $1.2trn in size. Banks are not there to fill the gap; and the private credit market is not large enough to do so, 9fin reported earlier this month.

Quite what to do is unclear? But some are beginning to dust off the old financial crisis playbook to find creative paths to solving the issue of problem loans: by turning to A/B loan structures. For there is nothing new in the world of finance, no matter how novel or creative the solution you think you’ve found. But veterans may have forgotten what these look like; rookies may never have seen them.

Simply put, a lender agrees to split up a loan into a ‘A’ tranche and a ‘B’ tranche, introducing a slug of equity in between put in by the sponsor. The B is written off or left to the mercy of fate as to whether it will be repaid, with lenders agreeing to accept some losses in order to be repaid on the A tranche.

A “hope note” is how one source described the B tranche to 9fin.

Understandably the klaxons ring out when someone is reviving anything from the financial crisis, especially in real estate. But many will point to the avenues of liquidity that exist today that didn’t then — private credit funds (albeit perhaps for the select few lucky borrowers). 

However, they might not be able to put up too much of a fight against the secular change of working habits — that ultimately many companies don’t need to occupy expensive real estate in major cities. Employees can be just as efficient working from home.

But the stresses in office valuations may be the spur for the ongoing structural shift from banks to non-banks. Indeed, it’s been well documented in the corporate direct lending space and real estate is following that same path: just with what may appear to be a lot of chaos in the meantime for many.