Are Direct Lenders making Levfin Irrelevant?
I'm an incoming analyst at a MM IB levfin group, and when I was an SA, we ended up losing a deal to direct lenders. At the time, the VPs in my group seemed to indicate that this was a common occurrence. Recently, I've been reading up to prepare for the job and stumbled onto a primer discussing direct lending. After reading it, I was wondering why anyone still bothers with a traditional syndicated process. Aren't direct lenders both faster and cheaper?
Also, in terms of my broader career arc, will direct lending eventually make levfin irrelevant? Any ways to mitigate this? Should I try to exit to a direct lender ASAP, move up to BB levfin (more use of HY bonds in bigger deals means less of a role for direct lenders)? Thoughts would be appreciated, thanks.
In my opinion there will always be a spot for the banks.
Whether it is "lowest cost of capital" or just doing the agency shit that no one else will do (some lenders are very uncomfortable with rental agents running a syndication), banks will provide some sort of value.
The deals may get far less exciting, almost hairless and more process / regulatory oriented than actual underwriting and diligence, but they'll always exist.
Couple of questions if you don't mind. Why would anyone care about cost of debt when a unitranche is cheaper because you only have to provide one set of loan docs? What agency shit are you referring to and what do you mean by "rental agent"? By hairless do you mean fees are going down? And what do you mean by regulatory and process-oriented versus underwriting and due diligence? Thanks for your help, trying to learn here.
Will come back with a fulsome answer (if I don't in the next few days, shoot me a message), but in the meantime, I would start with this https://www.spglobal.com/marketintelligence/en/documents/lcd-primer-lev…
Bump
Not true that that direct lenders are cheaper they require much higher yield than syndicated market
Direct lenders are becoming more prominent given the sheer amount of money that's been injected into the private credit asset class, but the broadly syndicated market will always remain relevant, and is definitely not going away. Not gonna list every single point as it'll get too long but I would say the 2 most important points are:
What is the "S" rate you're using? SOFR?
It would almost certainly have to be. There was a year end of 2021 deadline for issuing new debt based on LIBOR. But every bank was very slow to move on this because I know stuff was still being issued over LIBOR this past summer.
I think there are already posted some insightful comments above, but a slight nuance added to the discussion is that I have personally seen Direct Lenders primarily play in the mid-market (EBITDA smaller than EUR 30m). They are 100% reshaping the market in this segment, and are slowly involved in more than half of all transactions (I base this on an internal market research). If I wanted to become a traditional LevFin banker in the mid-market, I would rethink that ambition and see if a direct lender isn't the better option. However, in the large cap market, direct lending does not play a large role yet and banks have by far still the upper hand.
Last to thing to consider, is that many banks also have an internal direct lending arm (or are working on setting one up). If you are in the traditional LevFin team at that specific bank, you could start some coffee-chats and explore whether an internal lateral is of any interest to you. In my opinion though, when people on here talk about LevFin it's pretty much about large cap with institutional, syndicated, TLB's and secured/unsecured notes. That's a completely different experience compared to working on a mid-market transaction (from both a bank/direct lending perspective) where deal size, facility sizes, and structuring (less aggressive docs) is completely different.
Simply put, no, in my opinion. At the end of the day DLs are more flexible and have higher risk profiles but at a much higher cost of capital. I've seen especially in PE, if a DL financed company has a chance to pivot to a cheaper syndicate stack, the sponsor will pursue that because why not
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