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This article was written by Abhinav Ramnarayan and Kat Hidalgo. It appeared first on the Bloomberg Terminal.
Borrowers are increasingly swapping loans they received from direct lenders for more affordable debt from Wall Street banks, capitalizing on an ongoing rally in credit markets.
About $16 billion of debt has moved out of private funds and into syndicated loan and bond markets this year, according to Bank of America Corp. Thryv Holdings Inc., the owner of the Yellow Pages, and software firm Encora Digital are some of the latest issuers to signal their preference for traditional leveraged loans.
As leveraged loan prices rally, companies switching to the public side can lock in lower rates and also shake off debt covenants that tend to be more onerous than in syndicated arrangements. Many are doing so long before private loans come due through call options that can be triggered after just one year.
“Private credit has been more expensive for companies and carried more stringent covenants,” said Marina Cohen, a high-yield portfolio manager at Amundi SA. “Now they can refinance at a lower cost in the public market, with looser covenants so the competition is tougher for private credit.”
The deals underscore how Wall Street banks are clawing back high-yield, high-fee loans lost to the fast-growing $1.7 trillion private credit market in recent years. Leveraged loan prices near a 22-month high are working to banks’ benefit, allowing them to extend cheaper debt to companies than direct lenders are able to offer.
It’s the latest setback for private lenders facing increased competition from traditional banks with greater appetite for risk amid buoyant markets.
Already this year, banks won contested deals including Wood Mackenzie and Cotiviti Inc. Banks also managed to get Ardonagh Group Ltd. to divert nearly half of a $5 billion financing that private lenders had arranged to the broadly syndicated market.
In response, private credit funds are sweetening terms and cutting pricing. Traditionally, private credit could charge about 6 to 7 percentage points above a base rate, but this has dropped significantly in recent months. Earlier this year, Blackstone Inc. secured a $250 million loan at a rate of around 4.75 percentage points over the US benchmark to finance its purchase of Rover Group — one of the cheapest rates on record for a private credit loan, according to data compiled by Bloomberg News.
To be sure, not every company with an upcoming maturity can make a quick switch to public markets. Syndicated loans to a wide group take longer than quickly-executed private credit deals.
As direct lenders try to compete on pricing, banks are turning to tactics favored by their private credit rivals, including offering delayed-draw term loans and payment-in-kind arrangements that allow companies to delay interest payments.
The rivalry has at least one clear winner: buyout firms who are negotiating lower rates and easier terms in the oneupmanship between public and private lenders.
“From the issuer perspective, this possibility to select one market or another depending on pricing and market conditions is a positive, especially at a time of higher interest rates,” said Raphael Thuin, head of capital market strategies at Tikehau Capital, which has both public and private credit divisions.
Thoma Bravo is seizing on the competition by asking private lenders to slash pricing on the debt package that financed its buyout of Coupa Software Inc. by 2 percentage points to 5.5 percentage points above the Secured Overnight Financing Rate, Bloomberg News previously reported.
Others worry that standards may fall by the wayside in the scrap for deals, and that investors could be on the losing end.
“Public markets have started to reclaim share from private credit,” Barclays Plc analysts Bradley Rogoff and Corry Short wrote in a note this week. “But as competition heats up, too much capital chasing too few deals fuels concerns of mispriced risk and degradation of investor protections.”
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