Private Credit Firms’ Pursuit of Leveraged Debt Business
Private credit firms are increasingly vying for leveraged debt business from Wall Street, but this pursuit is coming at a steep cost. The safeguards that once made these firms less vulnerable to economic downturns are now being compromised.
Processing Content
What was once rare in the private credit market, permissive terms similar to those found in leveraged loans are now becoming more prevalent. Large borrowers with significant influence are demanding and receiving “covenant-lite” terms, a trend that is expected to accelerate based on recent deals.
For instance, private equity firm Permira Holdings negotiated loans without standard protections for two of its companies, showcasing the increasing acceptance of covenant-lite terms in the market. This shift is driven by the desire to win business, as highlighted by Ben Davis, partner and head of private credit at law firm Eversheds Sutherland.
‘Looser Terms, Lower Pricing’
Traditionally, private credit involves maintenance covenants that impose limits on leverage and are regularly tested. However, direct lenders are now striking deals with terms akin to those offered by banks, relinquishing some of the rights that previously allowed them to manage borrowers’ debt more effectively.
Top-quality borrowers are leveraging their clout to secure looser terms and lower pricing, a trend noted by industry experts like Hadrien Servais from Simpson Thacher & Bartlett. This shift is evident in recent deals such as Permira’s acquisition of services provider JTC and UK education software firm The Key Group on covenant-lite terms.
Packaging Private Credit into Bonds
Covenant-lite loans are not only prevalent in large transactions but are also making their way into middle-market deals, particularly in the collateralized debt market where funds package private credit into bonds. Middle-market CLOs have been increasing their acceptance of covenant-lite loans, indicating a broader trend in the market.
While some lenders continue to prioritize conventional covenants and safety in their deals, others are embracing looser terms based on trust between lenders and borrowers. However, experts like Amin Doulai from King & Spalding caution that proper covenants and contractual protections are essential when facing challenges.
For more information on how private credit is utilizing covenant-lite borrowing debt, you can visit here.
