For the $5bn-plus Cotiviti financing, banks are willing to go as low as the mid-300bps area over SOFR, as 9fin reported yesterday. This is partly driven by the recent rally in credit, which was further boosted by this week’s dovish Fed meeting.

Meanwhile, private credit firms including Ares, Blue Owl, Blackstone and HPS are offering their financing package at 550bps.

That differential is well within the 100bps-300bps range that, as we wrote last week, separates syndicated deals from direct lending right now. Private credit has bells and whistles (execution certainty, greater appetite for PIK coupons and DDTL tranches, etc) but sometimes simple economics can be the deciding factor — especially in an environment where sponsors are counting their pennies. 

And so the famed private credit flexibility is being put to work. Sources tell us that at least one direct lender is pitching a package priced at SOFR+475bps, with a hefty PIK component. 

A double-digit percentage return on the PIK element could be enough for a private credit firm to cover its cost of capital, but our sources say that some direct lenders have declined to participate in this particular package. If that ends up being the deciding factor, it would be an ironic twist — struggling to round up enough lenders for a deal is generally a BSL arranger problem. 

Of course, one deal does not make a trend, and the trend is generally that private credit is taking deals away from the BSL market:

• Synamedia, a video technology provider, turned to Adams Street Private Credit for a $460m financing package, after a downgrade from Moody’s in October
• We also reported last month that Vista Equity-backed healthcare software company Greenway Health was eyeing private credit as its syndicated refinancing attempt struggled to gain traction; this week, Bloomberg reported that Oak Hill Advisors did the deal

Those are prime examples of private credit being there when CLO investors don’t want to be — companies rated triple-C don’t work for this investor base, as our structured credit colleagues covered in detail earlier this week.

And these deals reaffirm the long-term structural trend in corporate lending markets: that more deals are being snapped up by the private credit market. Against that backdrop, the bankers we spoke to this week were very happy to feel the wind in their sails, for a change. 

Calling shots

The first question for any LP of any private credit firm is: what is your origination edge? 

There are a huge number of non-bank lenders offering senior, unitranche and junior loans, and it can be difficult for an investor to assess performance. That was especially true during the relatively benign (notwithstanding the pandemic) era of cheap borrowing. 

And when it comes to origination, being the first call for sponsors is critical for any successful direct lending operation. By the time a Chicago-headquartered business services company reaches lenders in New York, there may be questions as to the quality of the asset. How good can it be if it has fallen through the filter of players closer to home?

But deal origination is not just calls from sponsors. It’s being on the speed dial of investment bankers, M&A advisors, lawyers, and all the other parties involved: if you can get there first, take the lead on the deal, and ultimately be in control of the relationship with the sponsor, then you can call it a successful origination. LPs want to hear that lenders have control.

In this context, consider the news that JP Morgan is inviting private credit firms into a joint venture in which the bank would control which loans it originates, with other lenders putting in tickets without any veto power. 

The suggestion (unearthed by our peers at Bloomberg) that this has not gone down well with direct lenders isn’t hugely unsurprising. LPs definitely don’t want to hear that lenders don’t have control.

To paraphrase one LP source: bank tie-ups are not necessarily bad, but if direct lenders are cut out of the underwriting process, it will end in tears. If your pitch to LPs is that you have a great edge when it comes to originating loans, why would you hand over control of origination to your partner?

The recent flurry of bank partnerships has been a headline story for private credit this year (as we documented here), but cynics could suggest that this is just banks doing what banks have always done. Team-ups like this are a way to circumvent the very regulation that pushed them out of the parts of the market where direct lenders now flourish.

Then again, banks also have formidable origination capabilities themselves. And being associated with a household name can give a leg up to private credit firms who are trying to stand out from the crowd.