Jonathan Kitchen
By Susan Kasser, CFA
As banks have fled the syndicated-loan market, private lenders potentially stand to gain by picking up the slack.
What’s bad for banks may spell opportunity for private lenders: As rate hikes, geopolitical turmoil and slowing economic growth continue to stoke market volatility, banks that typically guarantee loan deals for private equity (PE) firms have retreated under a pile of unsold debt—thereby opening the door for private lenders to take significant market share in the coming months.
Issuance of both broadly syndicated loans (BSL) and high-yield bonds have fallen off a cliff in 2022. At just $14 billion, BSL issuance in the third quarter was the lowest we’ve seen since the fourth quarter of 2009.1 As banks have pulled back, private lenders are stepping in to serve high-quality, upper-middle-market borrowers on relatively attractive terms.
First, companies are borrowing at steeper rates to attract financing amid the uncertainty: Over the first three quarters of 2022, credit spreads over LIBOR have risen 50-to-100 bps—the largest nine-month increase we’ve seen on record.2 Original issue discounts (OIDs) have risen a similar amount, too.3
Second, borrowers are not generally as indebted as they were a year ago, potentially reducing risk for private lenders. Since the end of 2021, average leverage (measured as the ratio total debt to EBITDA) has fallen to 5.3x from 5.8x.4
We think the shift toward private lending will continue over the near- to-mid-term as banks retrench further and PE firms seek to deploy a record amount of dry powder—$561 billion as of September 30, up from $227 billion in 2013.5
With fewer willing BSL partners in the mix, we believe more PE firms will look to partner with private lenders to get deals done. As of September 30, Neuberger Berman’s private-debt team had reviewed 62% more potential investment opportunities compared with the same period last year. The pipeline, in our view, remains strong.
Notes: (1) S&P Leverage Commentary & Data (LCD); (2) Refinitiv (LPC), KBW Research; (3) Ibid; (4) Lincoln Middle Market: Lincoln International Valuations and Opinions Group; (5) Preqin.
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