During Q1 2024, borrowers returned to the US syndicated market to reprice costly private credit facilities
The US syndicated loan market has seen an uptick this year, with banks proactively pitching deals to win back market share from private credit firms. After a subdued period, in which rising interest rates and economic uncertainty stifled borrowing, sub-investment grade corporate borrowers are returning to the market.
In January, companies rated at B-minus or B3 by at least one ratings agency raised US$26 billion in term loans in the US syndicated market, according to PitchBook data—the highest monthly total in two years. These riskier borrowers accounted for 40% of all issuance in January, an increase from their 22% share in 2023.
That momentum continued through the rest of the quarter, particularly in March, as borrowers that had raised financing from direct lenders during more volatile conditions in 2022 and 2023 started returning to the syndicated market to refinance their more expensive private credit loans.
US institutional loan issuance rose to US$307 billion across 279 deals in Q1, a more than fourfold increase compared to the US$72 billion transacted in the first three months of 2023 and up 189% from Q4 2023.
Private credit competition
The recent uptick in syndicated lending comes as banks face increasing competition from private credit firms, which have gained market share in recent years. Direct lenders stepped in to provide funding for leveraged buyouts (LBOs) and borrowers with approaching maturities in 2022 and 2023, while other investors became more risk averse.
The battle for market share between the banks and direct lenders is illustrated by the recent dual-track bid for health care technology firm Cotiviti. KKR, which agreed to acquire a 50% stake in the company, was in talks with a syndicate of banks and a group of private credit lenders to finance the deal. Ultimately, KKR mandated that the bank syndicate finance the deal in what is understood to be the largest term loan financing to support a private equity buyout since GTCR’s carve-out of payments group Worldpay in September 2023.
Chipping away at the maturity wall
Barring notable exceptions such as Cotiviti, mega-cap M&A activity remains relatively subdued due to the high cost of capital. However, with interest rate margins down from the highs of 2023, refinancing activity has taken center stage. Indeed, two-thirds of the US$26 billion in loans issued in January involved refinancings.
This has helped companies to chip away at the maturity wall, when a sizeable share of debts are due to mature within a relatively short timeframe. According to Bank of America Global Research, the amount of debt due in 2024-26 has been trimmed by 40%, or US$329 billion, since Q1 2023. In an analyst note, Bank of America characterized this period as “one of the most aggressive instances of maturity extension in the history of leveraged finance.”
However, an outsize portion of that shift applied against the 2024 wall. The amount of loans maturing this year has decreased by almost 88% since measured at the end of 2022, from US$74.9 billion to just US$9.3 billion. Meanwhile, as of December 2023, US$89 billion remained due in 2025 and US$178 billion remained due in 2026. And 51% of the maturities for 2025 are attributed to issuers with B-minus ratings, indicating potential challenges ahead for these riskier credits, especially if financing costs remain relatively high and investor risk appetite retreats again over the coming months.
Long-term downtrend
Until the recent increase in activity, the US syndicated loan market had generally trended down since H2 2018. The pandemic-induced dip in 2020 and subsequent bounce-back in H1 2021 were followed by a resumption of that downward trend, which continued up to the recent rash of activity this year.
Banks are now increasingly entering the private credit space to regain market share they had lost to direct lenders. Wells Fargo, Deutsche Bank, Société Générale and Rabobank are among the banks that have recently launched private credit platforms alongside their traditional leveraged lending operations.
This move is seen as the banks’ strategy to reclaim ground in financing LBOs and compete in the booming private credit market, which some borrowers have been drawn to because of certain execution efficiencies relative to the syndicated market.
Potential convergence
Banks are also now exploring collaborations with private credit firms and other investors to create hybrid syndication groups, helping to fund loans and spread the risk. This strategy involves banks pairing up with non-bank investors to finance deals, aiming to benefit from fees while managing regulatory capital requirements.
These collaborations are expected to introduce more complex capital structures, for example, with banks providing senior-secured financing and direct lenders providing junior tranches. Such convergence may also give rise to a secondary market for hybrid private credit/bank debt, where large transactions could be traded among investors.
Banks continue to claw back market share with their own direct lending offerings, but the recent spate of syndicated refinancing activity suggests that this traditional form of financing, and the more competitive pricing it has to offer borrowers, still very much has its place in the leveraged financing market.
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