Mar 13, 2024

Private Credit Has Had Its 15 Minutes of Fame

New article from Bloomberg: "Private Credit Has Had Its 15 Minutes of Fame"

https://www.bloomberg.com/opinion/articles/2024-0…

What's your take on this? Struggling to understand how DL funds can be competitive / profitable when banks can underwrite debt below 4%

 

My honest thoughts are that the Golden Age is over, there will still be a place for private credit for certain assets and of course in the mid market space, but deals like Cotiviti that are functional large businesses without a need for excess leverage will go to syndicated. There's a level where the lower cost of debt on 5x breaks even with expensive debt at 6.5x for IRR for sponsors. Private Credit pricing is tightening but should mechanically always remain wider than the BSL market.

The big question for me is where will all this private credit AUM go. Will private credit firms continue to race to the bottom on covenants, terms and pricing? Probably. Will there be industry consolidation? Most likely.

I think private credit will exist as a cap on the BSL market in that pricing on syndicated loans can't widen too much or else then it will go to direct lending but likewise, private credit pricing is also constrained by the syndicated loan market.

 
Funniest

But what about my 10-12% equity like return with little to no risk Mr. Schwarzman offered

 

 

RIP to your PE fund if you are targeting 10-12% returns. Not hard to get to 10-12% IRR with 1.5-2x fund leverage that all the large direct lenders utilize in the large, stable deals. 

Life is more than dollars
 

Yup my same thought process too. It was obvious clear as day. I expect alot of private credit bonuses come back down to earth and alot of consolidation. Imo those who partner with banks will have an advantage due to banks having those sponser relationships. Which is where I see where private credit will have most of its use for. 

 
Bananaman97

Yup my same thought process too. It was obvious clear as day. I expect alot of private credit bonuses come back down to earth and alot of consolidation. Imo those who partner with banks will have an advantage due to banks having those sponser relationships. Which is where I see where private credit will have most of its use for. 

I believe alot of the big bank partnerships are intended for non-sponsored flow fwiw.  

 

From what I know banks make most of their money from 

1) treasury responsibilities from business partners

2) M&A activity from sponsers

So thats why I think that the access to those relationships will be very valuable to a private credit firm whose main money maker will be M&A activities. I do not see how PC can remain competitive with the maturity wall coming up if rates come down and banks can swing their balance sheets to win back business. 

Im interested in what you think

 
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Bananaman97

From what I know banks make most of their money from 

1) treasury responsibilities from business partners

2) M&A activity from sponsers

So thats why I think that the access to those relationships will be very valuable to a private credit firm whose main money maker will be M&A activities. I do not see how PC can remain competitive with the maturity wall coming up if rates come down and banks can swing their balance sheets to win back business. 

Im interested in what you think

PC firms also have strong sponsor relationships and often significantly times stronger relationships than certain banks given PC lenders tend to hold debt on their balance sheet / also agent deals. 

PC firms are partnering with banks to get access to those banks non-sponsored lending flow which PC firms do not have and are too lean to have the infrastructure to really build out.   Look at the Citi / Luminarx & the Wells / Centerbridge relationships, those are targeted towards non-sponsored commercial banking clients, not to help PC firms get sponsor companies.  

Also the maturity wall, generally exists for a reason.  There are a good deal of names that private credit can touch with shorter term issues that the banks cannot touch due to ratings (banks need to be able to sell loans to CLOs).   That's what drove quite a few names over the fence for example PetVet, Tecomet, CPP. 

I'm not saying PC is taking over the world, but there will be some staying power.  

 

what is comp like in the syndicated space and what banks have good platforms?

 

We lose out in our sponsor space all the time especially in HC. Many HC verticals have crazy margins that are going away very soon with some Medicare bills currently in congress and they are fully capitalizing on the build up.  When private credit can offer step down covenants ending at 10x CF leverage (high risk add backs on top of it) at some shops a traditional bank can’t compete. Also in cash flow lending with minimal collateral a private credit shop may be more willing to take the loan than a more regulated bank. 
 

now, when regulation hits some of these industries or margins erode under a heightened inflationary environment those same private credit firms will be holding the bag. When you let companies lever like crazy with minimal tangible collateral and they go under you’re stuck eating a massive loss especially when the company valuations tank as they milk any value they have left. PE shops will make out just fine as these private credit shops hold the bag. 
 

i don’t think it’s over for them yet and there will always be a place for some of these larger more established shops, I think a day will come where these smaller shops took on too much risk.

 
CorpCredit

We lose out in our sponsor space all the time especially in HC. Many HC verticals have crazy margins that are going away very soon with some Medicare bills currently in congress and they are fully capitalizing on the build up.  When private credit can offer step down covenants ending at 10x CF leverage (high risk add backs on top of it) at some shops a traditional bank can’t compete. Also in cash flow lending with minimal collateral a private credit shop may be more willing to take the loan than a more regulated bank. 
 

now, when regulation hits some of these industries or margins erode under a heightened inflationary environment those same private credit firms will be holding the bag. When you let companies lever like crazy with minimal tangible collateral and they go under you’re stuck eating a massive loss especially when the company valuations tank as they milk any value they have left. PE shops will make out just fine as these private credit shops hold the bag. 
 

i don’t think it’s over for them yet and there will always be a place for some of these larger more established shops, I think a day will come where these smaller shops took on too much risk.

Yeah it hasn't happened yet but there also may be a time where the larger PC shops who are leading deals start taking disproportionate economics from smaller lenders in restructurings / workouts.   Firms like Blue Owl, Blackstone, Ares, KKR taking 85c of recovery when all the smaller flow private credit lenders who are taking small slugs of the lead PC deals get like 70c which will create more dispersion in returns.  

HC is a bit tricky given many of the huge platforms that are semi-exposed (RADPAR, EYEPAR) are syndicated stacks today. Obviously some of the larger companies that got hosed by No Surprises - TMH, ENV, AIRM, AIRMETHODS all got smoked in syndicated land as well.

There however is a tail of smaller versions of those companies held by private credit lenders but point is that pain is somewhat shared there.  

 

The liability management transaction activity in the LTM across HC and tech is pretty nuts... But typically all the holdouts at least get a chance to agree to the LME before getting diluted. LMM and MM looking more and more attractive in clubs of 2-3 lenders who usually know eachother well. 

Life is more than dollars
 

Hard to see how HC-focused PE shops taking multiple zeroes would "make out just fine" when senior lenders are getting significantly impaired...

Life is more than dollars
 

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