Over the last decade, market participants have observed direct lenders quietly taking market share from traditional bank lenders. As direct lenders have begun to write deals in the billions it seems the FT and the financial markets more generally are paying closer attention to the rapid shift. The FT recently featured direct lending in their podcast “Behind the Money”.
In the US, according to “Behind the Money”, Carnival reportedly discussed a financing with private credit providers before they were able to successfully issue their rescue bond and Bombardier reportedly borrowed £1bn from a club of direct lenders, choosing private credit over the public bond markets and syndicated corporate bank lending market.
Closer to home in the UK direct lenders recently broke records by arranging the largest ever unitranche loan at a reported £1.9bn.
The FT discussed the motivations for a large corporate borrower choosing private debt, citing:
- more flexible terms vs the bond market;
- issues accessing bank financing for businesses operating in industries affected by Covid-19; and
- access to ready dry powder capital.
Other reasons include, speed of execution, genuine relationship lending, volatility resilient and totally bespoke terms to mirror business strategy.
As markets evolve, with potential further market dislocation, it seems likely that corporate borrowers will see private credit providers as a favourable choice vis a vis other financing options available to them, as they look for a more flexible and bespoke debt solution to flex with recovery plans.
The attractive risk weighted return afforded to investors in private debt vs other asset classes (including public debt) has long been an attraction, but just as there has been a reported “rush” from corporate borrowers accessing the private debt markets, we may see a similar trend in the investor community as investors look for exposure to the debt of businesses they would otherwise be able to invest in via the public bond markets. Some may view this as history repeating itself with respect to the equity markets, with fewer companies having listed on public exchanges in recent years and consequential increase in investment of investors in private equity.
As debt markets continue to evolve, with increasing pressure from Covid-19 accelerating the change, this so called “dash to cash” (as referenced in the podcast) from corporates to private debt looks set to continue as does interest in private debt from the FT and other financial market commentators.