Banks Notch Up LBO Deal Wins From Private Credit Firms

After a year dominated by direct lenders, investment banks are now winning some bigger deals in the buyout financing market.

(Bloomberg) — After a year dominated by direct lenders, investment banks are now winning some bigger deals in the buyout financing market.

Among them are the $9.4 billion of debt financing backing GTCR’s purchase of a majority stake in Worldpay Inc. — the largest buyout financing since Elon Musk’s takeover of Twitter last year. A group of banks are selling the leveraged loans backing a take private of Software AG, and traditional lenders are also leading financing for PAI Partners’ acquisition of a majority of Infra Group.

The deals indicate the return of risk appetite among banks following a period marked by the hung debt stuck on their balance sheets after Russia’s invasion of Ukraine. Now that they’ve gotten rid of most of those commitments — albeit at huge losses — banks are eager to earn fees again and set up a pipeline of deals for the rest of this year. Underwriting buyout debt is a lucrative and much sought-after business as it provides some of the most generous fees on offer in investment banking.

That means more competition for the private credit firms which filled the funding gap while banks were struggling. Direct lenders are still able to offer larger amounts of debt to equity in deals, but banks are now better able to compete on pricing, according to bankers. For some deals, the rates banks are offering are up to 100 basis points cheaper, they said.

“The terms that we can offer have improved marginally,” said Daniel Rudnicki Schlumberger, head of EMEA leveraged finance at JPMorgan Chase & Co. While direct lending was cheaper last year, “there is now a more level playing field between direct lending, high yield and leveraged loans,” he said.

The resurgence of banks comes as more benign market conditions fuel risk appetite among institutional investors — making it easier to sell on debt. The iTraxx Xover, a gauge of credit risk sentiment in Europe, is now near the lowest level since early March, before the collapse of Silicon Valley Bank drove up the price of credit insurance for junk-rated issuers.

Banks are also more confident in doing deals because leveraged loan prices in the secondary market have been rising and the collateralized loan obligation market — the biggest buyer of loans — is showing signs of life. Some recently formed and upcoming CLOs need to buy loans, and bankers estimate that with CLOs buying, Europe can absorb around €750 million ($842 million) to €1.25 billion of debt per deal.

Banks’ Advantages

For the private equity firms, financing from banks offers several attractions over direct lenders, including a more diversified lender base and more flexibility. Term loans from banks typically don’t include the restrictive non-call provisions that some private credit firms use, which can prevent any refinancing for up to two years. 

“As the market has improved, this has led to underwritten deals becoming economically competitive versus direct lending options, while also offering more flexible documents and a more diversified investor base,” according to Dominic Ashcroft, head of EMEA leveraged finance at Goldman Sachs. 

In ongoing deals, banks are also expected to win out against private credit firms in providing up to €1.5 billion of debt to back a potential take-private of Spain’s Applus Services SA, according to people familiar with the matter. Several other sale processes are firming up in Europe after many fell apart earlier this year due to mismatched valuation expectations.

To be sure, the resurgence of banks may not last if markets turn sour again. And if interest rates continue to rise it may become untenable for some companies to service high debt loads — which may spook banks if they think they’ll struggle to offload it.

And even with the banks now winning some buyout deals, the $1.5 trillion private credit industry is here to stay. The asset class has become popular with buyout firms over the past year as a fast and effective way to fund deals. Direct lenders last month won out over their banking counterparts in supplying the debt to back EQT AB’s acquisition of Dechra Pharmaceuticals Plc.

“Sponsors are now telling us they have options and can find some liquidity in the syndicated markets,” said Luis Mayans, head of private debt for Caisse de Depot et Placement du Quebec. “If the banks open up that will increase competition for direct lenders in the near term, but in the future, this could kickstart M&A activity.”

(Adds context to underwriting fees in third paragraph. A previous version corrected the title of Daniel Rudnicki Schlumberger.)

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