The competition between banks and direct lenders in the leveraged buyout arena will likely result in more defaults as riskier debt deals get done, according to Moody’s Investors Service.
(Bloomberg) — The competition between banks and direct lenders in the leveraged buyout arena will likely result in more defaults as riskier debt deals get done, according to Moody’s Investors Service.
Private credit firms and banks have been in a tug of war over financing new deals, with direct lenders raising huge amounts of capital to do so. Following a contraction in buyout activity over the last two years, Moody’s says it expects dealmaking to rebound in 2024. Increased competition to finance those mergers and acquisitions will fuel systemic risks as pricing, terms and credit quality erodes, analysts including Christina Padgett wrote in a note Thursday.
“Any ‘race to the bottom’ over LBO terms and pricing has broader systemic risk implications in an environment where the economy is already weakening,” they wrote. “At the same time, a growing segment of the riskier leveraged loan market is being swept into private credit, beyond the purview of prudential regulators.”
The market for buyout debt has returned after the Labor Day holiday in early September. Banks have recently managed to sell debt related to GTCR’s purchase of a majority stake in payment processor Worldpay Inc. and the buyout of Syneos Health Inc. after seeing strong investor demand. Lower-rated borrowers have been emboldened to rush into the leveraged loan market as investor risk appetite holds up, helping borrowers like Fogo de Chão get better pricing on its transaction.
Read More: Junk Borrowers Seek Riskier Loans While Market Is Receptive
Lenders in Europe are also moving quickly to line up a debt package for the buyout of Stada Arzneimittel AG to prevent private credit firms from swooping in.
Moody’s sees junk borrowers that have relatively better ratings continuing to tap the syndicated loan market to take advantage of more favorable pricing and terms as rivalry intensifies between entities financing these deals.
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