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The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Sign up for the inside track on this fast-growing market.
Midas touched
With spreads grinding tighter and defaults picking up, the “golden age” rhetoric around private credit is starting to feel a little long in the tooth.
Sure, it’s still possible to find double digit yields on private floating rate loans, but those opportunities are increasingly scarce thanks to thanks to increased competition and now that rising interest rates have plateaued.
Take a look at the Q4 US Private Credit review produced by 9fin’s Elijah Jackson this week, for more detail. Average spreads appeared to have bottomed out at around the SOFR+500bps, according to the report — though this is taken across large cap lenders and the more juicy lower-middle market.
The next situation to watch is Finastra, the company at the center of a high profile syndication in 2023. The software company is considering its options for over $5bn of existing debt, which could include a repricing, refinancing or even pivoting to the BSL market. Considering the size of the debt stack, it would not be too surprising to see another print below 500bps — especially if the company turns to cheaper options in the bank debt market.
In the crosshairs
Granted, these are large cap loans and higher spreads are still available in the lower middle market.
For example, Blue Torch’s $40m loan to coffee chain Black Rifle Coffee was priced in the SOFR+600bps-650bps range, 9fin reported earlier this month. A premium of about 100bps over a large cap loan for a company with a $35m-$40m EBITDA makes sense — but the loan is a drop in the ocean compared with the billions that direct lenders are looking to put to work in large cap names.
Private credit faces tough competition from red hot syndicated debt markets in large-cap corporate lending, and if Finastra ultimately pivots to a bank financing, it will further compound the trend of banks clawing back market share.
As it stands, according to the Q4 report, banks captured 72% of deals in Q4, up from 65% in the previous quarter. The story of 2024 was increasing bank appetite in the loan market — 2025 may be shaping up to be the same story.
Experienced direct lenders will be able to accept the reality of the market. Banks coming in strong forces private credit firms to compete on pricing, and some of the larger private credit firms might be able keep pace to a certain extent.
But how will LPs feel about shrinking margins?
LPs are still benefiting from roughly 150bps-200bps of illiquidity premium, in line with historic levels — based on 9fin data showing median BSL pricing in Q4 around 325bps, and private credit margins around 500bps.
They’re also still seeing increased overall yields on direct lending compared what was achieved historically, considering the SOFR rate is 435bps as of 29 January, though down from the 500bps level seen for much of 2024.
So even if the margins on private credit loans are about 100bps lower since 2023, LPs are arguably still getting bang for their buck. That may explain why, as 9fin reported, the Los Angeles Employees’ Retirement System is splashing out $4bn in private credit over the next five years. It’s one of many LPs that are bullish about private credit and want to increase their allocations to the sector.
The flipside is that the downward pressure on margins is happening at a time when defaults are ticking up as a larger number of borrowers feel the pressure from sustained high rates. See, for instance, Fortra, Aimbridge, and Alacrityas recent examples of private credit restructurings that 9fin reported on.
Quite where the market goes from here remains to be seen. But if you believe that the M&A market will pick up, then that rising tide may help all lenders, bank or non-bank, and spreads may again shift back in the right direction.
Dream Games— The Turkey-headquartered mobile game maker behind popular names such as A Royal Flush is working with Goldman Sachs to raise up to $2.5bn in debt and equity
X — Owned by Elon Musk, the social media company is now looking to unload $3bn of debt at 90 to 95 cents on the dollar. Morgan Stanleyis leading the process
Finastra— The fintech company is exploring either refinancing or repricing its $5bn-plus debt load. The company went the private credit route to tackle looming maturities
One Call— Private credit firms are being called up to refinance the healthcare coordinator’s $1.3bn public debt. The company currently has backed from KKR and Blackstone
Neptune Retail Solutions — After first sounding out the BSL market, the retail advertisement company is turning to private credit for a $675m debt package
Frazier & Deeter— The accountancy firm is being marketed on a $20m LTM EBITDA and is proving to be a popular asset as sponsors are bidding up to 15x
Encyclopedia Britannica — Bank of America has been brought on to advise on the sale of the $40m-plus EBITDA company
Earlier this week, 9fin hosted its first US private credit event, with drinks, nibbles and a robust discussion on some of the biggest topics in private credit.
9fin’s senior reporter Shubham Saharan hosted a talk with Richa Tandon, co-head of origination at Benefit Street Partners and Jennifer Daly, head of private credit and special situations at Paul Hastings, captivating an audience at Corkbuzz in New York.
Please stay tuned for future events hosted by 9fin — and if you were lucky enough to attend this week, please get in touch with any feedback on how it went!
