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Liquidity crisis: Syndicated slowdown opens the floodgates for private credit

In the first half of this year, when the markets for liquid primary leveraged loan and high-yield bond issuances were brought to a grinding halt, buyout groups were suddenly left with few options for financing large-scale takeovers. In response, private credit stepped in to fill the void in public debt markets. Multibillion-euro leveraged buyouts that would typically have been financed by dozens of CLO or high-yield bond investors are now routinely being funded by direct lenders, armed with dry powder and hungry to deploy, despite the challenging deal climate.

More than 10 transactions earmarked for potential syndication this year were ultimately bankrolled by direct lenders, either in full or in part, Debtwire analysis shows.

One of the most recent examples is Trescal, which is poised to be taken over by EQT Infrastructure. The sponsor last month entered a period of exclusivity after securing more than EUR 600m of commitments from a five-strong private credit club to support the transaction. This deal – like many others – was dual-tracked: Marlborough Partners was mandated to orchestrate bank-supplied staple financing, while direct lenders waited on the sidelines, as reported. But, in the end, EQT Infrastructure sidestepped the staple, opting to tap private credit providers. If the buyout group succeeds in acquiring Trescal, the France-based calibration services provider will shift its historic reliance from bank financing to private credit.

Several other acquisitions this year have been underpinned by unorthodox financing, after traditional credit markets entered a state of inertia.

Take Advent International’s takeover of IRCA, the Italian ingredients manufacturer, for instance. In April, Goldman Sachs and BNP Paribas had prepared a EUR 430m floating-rate note that would have part-financed the deal. However, public credit markets quickly soured, prompting CVC Credit Partners to step in six months later to provide senior and acquisition facilities to fund the buyout.

Another transaction earlier in the year followed a remarkably similar path.

Germany-headquartered CordenPharma, whose lipid process development technology supports Moderna’s COVID-19 vaccine, was acquired by Astorg for a reported EUR 2.4bn. The sponsor had initially anticipated that banks would provide the debt for the transaction. But in March, Astorg was forced to enter last-minute negotiations with direct lenders as it scrambled to assemble its binding offer at a time when the Russia-Ukraine conflict was intensifying. In the end, Astorg secured a highly leveraged financing package worth around EUR 1.5bn from a club of at least four private credit providers in May.

Norgine, the Dutch pharmaceuticals giant taken over by Goldman Sachs Asset Management in May, was a particularly peculiar case that took market participants by surprise. In a rare move, Goldman Sachs joined forces with Jefferies and KKR Capital Markets to underwrite senior loans worth EUR 650m, before reportedly selling them on to direct lenders later down the line, according to BloombergThis pioneering play was designed to enable the consortium to bypass traditional financing routes, thereby evading market volatility.

Then there was Clayton, Dubilier & Rice’s much-vaunted take-private of UK-based supermarket chain Morrisons. The GBP 9.8bn deal – the largest leveraged buyout the UK has seen since the 2008 financial crisis – was underwritten during a torrid time in public credit markets. The original GBP 6.6bn debt package, including a GBP 1bn RCF, was to be taken out via GBP 3.6bn-equivalent of senior secured and unsecured notes and GBP 2bn-equivalent of term loan B tranches. Instead, the arrangers privately placed GBP 2.73bn-equivalent of notes and around EUR 800m of loans at steep discounts, with investors including PIMCO and CPPIB among others, whilst also selling a portion of the TLB loans to Asian lenders and placing a GBP 563m term loan A carve-out on banks’ books. Ultimately, the hung deal left underwriting banks on the hook for billions of pounds’ worth of loans that they failed to offload.

Because private credit is one of the only options on the street at present, it has therefore become more expensive. Private equity-backed issuers are being forced to pay a premium for the flexibility, speed and certainty offered by direct lenders in a market otherwise fraught with risk. This year, the average yield on first-lien institutional loans is 5.52% – up from 3.95% in 2021 – according to Debtwire analysis. By comparison, euro-denominated unitranche facilities underpinning large-cap buyouts now typically carry a margin of 650bps-plus above the Euribor benchmark following a recent repricing. Factoring in base rates of around 3% plus fees, direct lenders are effectively achieving yields in excess of 10%. Such returns were almost unimaginable this time last year.

Whether private credit will continue to be the favoured financing route once liquid loan and bond issuances return remains to be seen. When, exactly, the full re-opening of the syndicated market will occur is the million-dollar question.