Investment banks including Goldman Sachs (NYSE: GS) are pitching broadly syndicated refinancings of some of the riskiest types of private credit, in the latest sign that Wall Street is trying to poach back business from direct lenders.
Bankers in Europe are speaking with buyout firms about options for private payment-in-kind debt their companies took on when broadly syndicated markets were much more volatile and expensive. Now that conditions have improved, institutional lenders are becoming increasingly assertive.
“A lot of sponsors have been doing PIK but in the private market,” said Luke Gillam, co-head of EMEA credit capital markets at Goldman Sachs. “This is now the chance to use the public markets to refinance those instruments, which are much cheaper than private credit.”
In many cases, the private debt can be refinanced as PIK toggle bonds, which give borrowers the option to delay interest payments until the notes’ final maturity. The issuer typically agrees to pay a higher interest rate if it opts to defer the payment.
Up to this point, PIK bonds have been a rare sight — there have only been a handful sold in Europe’s high-yield bond market since Russia’s invasion of Ukraine in 2022. But the structure has been a feature of private credit financings over the past couple of years, giving companies more flexibility to refinance or raise new debt despite steep interest rates.
Banks have been going after private credit business since the beginning of the year. After refinancing many “unitranche” deals that blend first and second-lien debt into the syndicated market, they’re moving onto the junior debt that was privately placed by direct lenders.
The pitch is one of price: banks can now sell debt at a much cheaper cost than direct lenders thanks to a leveraged finance market that’s booming in anticipation of interest rate cuts.
“The publicly-syndicated market is now more open than the last two years, and so banks are looking at ways in which they can claim back ground taken by direct lenders,” said Ambarish Dash, a partner at law firm Herbert Smith Freehills.
New Deal
Italian packaging firm Fedrigoni SpA sold €300 million (about $326 million) of payment-in-kind toggle notes earlier this month at prices much lower than typical private credit alternatives.
The CCC-rated note priced with a cash coupon of 10 percent or 10.75 percent in the event that interest payments are deferred, less than the 12 percent that direct lenders are generally charging.
Fedrigoni is set to use its PIK note to refinance an expensive loan provided by Bain when it sold a stake in the business to BC Partners in 2022. The old debt also had a PIK element. The firm gets a cheaper cost of capital from the new PIK bond and keeps flexibility to use free cash flow to pursue mergers and acquisitions.
Investor appetite for the deal, which also included 6.125 percent seven-year bond, was high — the book was three times oversubscribed, the company said.
Some banks are even pitching PIKs as a tool to fund dividends. Such deals were popular during the easy money era, as well as in the run-up to the 2008 financial crisis. Their resurgence in 2024’s market — where risk premiums remain tight but higher interest rates have dampened overall issuance — give banks a way to maintain private equity business while M&A activity remains muted.
Private credit firm MV Credit has previously extended PIK debt to fund a dividend, said managing partner and Chief Investment Officer Rafael Calvo. However, the sponsor must have significant original equity at stake, Calvo said.
“Investment discipline is key despite the competitive nature of our market,” he said.
Managed effectively, PIK bonds pay bondholders a hefty coupon, and a borrower can eventually pay off the full obligation with the proceeds of a sale or an initial public offering.
“PIK allows a company to increase debt without incurring the burden of debt servicing,” said Giacomo Reali, a partner focused on high-yield bonds at law firm Linklaters. “The company can use the extra cash to become a better business so it can afford to refinance a bigger debt pile down the line.”
But investors also run the risk of missing out on cash payments and ending up saddled with a riskier borrower that buckles under the weight of its mounting debts.
EB Holdings II, the holding company for Howard Meyers’ worldwide lead empire, is a cautionary tale for investors. The company filed for bankruptcy protection in 2019 after a years-long debt fight with hedge funds over a €600 million PIK loan agreement signed in 2007 and which had allegedly ballooned over time to $2.5 billion.
“In a default scenario, one would expect the value to often break below the PIK debt, resulting in very low recoveries, whether it is a bank lender or private credit provider,” said Paul Watters, head of credit research EMEA at S&P Global Ratings.
