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The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Find out more about 9fin for private credit here.

The prevailing sentiment for a long time now is that it is a borrower friendly market this year. A lack of M&A activity continues to push private credit firms to jump on every opportunity.

As a result, private credit firms are accepting even lower spreads on regular way middle market deals. A recent report from Configure Partners found that spreads have compressed drastically in Q2.

The average spread for deals fell to 532bps, down from 616bps in the first quarter. Even going back to the end of last year, Q2’s average spread was tighter than the average of 574bps in Q4.

A closer look at the data shows that the most common spreads on middle market senior or unitranche loans in Q2 fell in the 300bps-499bps range, despite only 16% of deals in Q1 being completed at such a low spread. Another 30% of deals fell in the 500bps-550bps range, the most popular group of spreads in Q1.

In the first quarter, the second most common spread level on new deals was between 700bps-750bps, by comparison.

Recent financing activity covered by 9fin illustrates the continued compression in spreads. Take publicly-listed GoHealth’s attempts to refinance its debt. The health insurance marketplace is seeking around $500m to secure a loan at a 650bps margin — a 100bps cut from its existing facility.

But even when private credit firms make it clear they’re willing to underwrite loans at a low price, borrowers are still able to find competitive pricing terms in the BSL market.

K2 Insurance, for instance, has sought seeking to refinance with banks, looking to reduce its interest burden with price talk of a new loan at SOFR+375bps. The company’s existing private credit facility is priced at SOFR+675bps, 9fin’s BDC database shows.

But it’s not just pricing where borrowers are negotiating hard. Covenants, too, are in the crosshairs for sponsors, and they attempting to negotiate looser packages on private credit loan documents, which are typically tighter than bank offerings.

Configure’s data shows we’re slowly heading towards the giddy days of 2021, which a was a bumper year for private credit deployment. Numerous firms reported record deal activity, with the trade off private credit firms were underwriting deals on looser terms.

For example, Configure found that in 2021 almost 80% of loans issued only had two covenants, with just over 15% having one and the small remainder carrying three. Numbers in 2022 were similar, with two-thirds of loans carrying two covenants, a quarter carrying one, and just over 8% including three covenants. In Q2 this year, two-thirds of deals carried two covenants and the remainder had only one covenant. No loans had more than two.

In the first quarter this year, by comparison, a third of deals carried three covenants and almost 7% of them carried four. Last year, over a quarter of middle market deals had at least three covenants in deals.

Private credit lenders are hoping that a number of expected rate cuts will open up the M&A floodgates. That coupled with the removal of election uncertainty within next month maybe cause for optimism.

For now the market is in wait and see mode.

It is also worth noting that Configure’s data highlighted a few key trends in the middle market. Starting with fundraising — which has generally been down this year — the share of capital is concentrated among the larger funds.

In 2024, almost 90% of private debt capital has been raised in funds larger than $1bn. What is stark, is that 41% of funds raised are now over $5bn, further elevating the managers that can raise large funds (see Ares and HPS). 2020 was the last year that the volume of funds under $1bn outpaced those over $5bn, according to Configure data.

Refinancings in this space continue to dominate. The stat that jumps out of the report is that year-to-date 2024, refinancings and other uses of proceeds are outpacing LBO and M&A activity 52% to 48%.

If this trend holds, it would be the first year since Configure started tracking data (2019) that other use of proceeds would outpace traditional buyout financings. It seems like it will too, given that Configure’s pipeline is currently 60/40 in favor of refinancings over LBO financings.

Already missing the summer? Tiring of the fall weather?

Then perhaps you’ll want to take the opportunity to get yourself down to Miami on 21 October for Private Credit Connect: East. 9fin’s very own Peter Benson and Shubham Saharan will be attending what will be a full day of talking all things private credit.

For more details on the event and if you want to register click here. And if you see either Peter or Shubham on your travels, feel free to say hi.

9Questions — Ben Radinsky, HighVista Strategies — Specialty lending takes center stage (free to read)

Direct lenders back Imagine360’s dividend recap

California pension fund to invest $190m annually in private credit

Golub’s middle market index shows earnings growth ease off (9fin)

GoHealth — the public company is seeking a refinancing of around $500m in privately placed debt

Anaqua — the Astorg-backed IP software firm is up for sale with the help of Jefferies and Arma Partners

MRI Software — in the market for a repricing of its existing $2.5bn debt and is seeking a $250m incremental loan for additional M&A

Vista’s Alegeus hits roadblock in effort to shed private credit (BBG)

U.S. companies financed with private debt see increase in bankruptcies — S&P Global (P&I)

Apollo, Citi pave way for `marriages' in private credit (BBG)

Private credit firms gain ground in CLO market (Mergers & Acquisitions)

Will private credit produce another Kirkland? (Law.com)

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