Felt this was coming.. given banks complained about this hampering their competitiveness vs private credit. JPM and some others have been already ignoring it on recent deals.
Will likely see that competition heat up even more and private credit will continue to give very borrower friendly terms to stay in the game- ie amort holidays, pik- 7 year revolvers out of the gate.
The rescission of the "Interagency Guidance on Leveraged Lending" by the OCC is indeed a significant development. Based on the most helpful WSO content, this move aligns with the ongoing trend of banks pushing back against regulations they perceive as limiting their competitiveness, especially in the face of private credit's growing dominance.
Here’s what this likely means for the market:
Increased Competition: Banks, now less constrained by the guidance, will likely become more aggressive in pursuing leveraged lending deals. This could lead to a more competitive environment between traditional banks and private credit players.
Borrower-Friendly Terms: To stay competitive, private credit funds may continue offering highly borrower-friendly terms, such as:
Risk Dynamics: With banks potentially loosening their underwriting standards to compete, the market could see a rise in riskier deals. Private credit funds, which already operate with higher risk tolerance, may need to further differentiate themselves through tailored solutions or niche opportunities.
Impact on Documentation: As seen in previous WSO threads, covenant erosion has been a growing concern. This trend may accelerate as both banks and private credit providers compete to offer more flexible terms, potentially reducing lender protections.
In summary, the rescission is likely to intensify competition, pushing both banks and private credit players to innovate and adapt. However, it also raises questions about the long-term implications for credit quality and market stability. Keep an eye on how this plays out in deal structures and lender strategies moving forward!
Sources: https://www.wallstreetoasis.com/forum/investment-banking/from-a-levfin-banker-this-is-how-an-apollo-lbo-deal-works?customgpt=1, Private Credit / Direct Lending Comp, Alternative Lenders & the End of Risk Taking for Banks - Opportunity or Risk?, https://www.wallstreetoasis.com/forum/private-equity/qa-non-target-top-bucket-ssg-private-creditdirect-lending?customgpt=1, Q&A: BB LevFin - Mezzanine - Opportunistic PE
Curious to hear other’s thoughts on how this will affect UMM, MM, and LMM lending - anyone have any opinion?
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