A fresh showdown is emerging between banks and private credit funds as they compete head to head to finance deals in a nascent recovery in leveraged buyouts.
Banks and direct lenders are looking to put billions of euros of loans to work financing potential acquisitions that have cropped up in recent weeks, of companies including Dechra Pharmaceuticals Plc, Constantia Flexibles and Civica. In the U.S., Syneos Health and a unit of Baxter International Inc. have recently announced LBOs.
“Activity levels are picking up across Europe but remain below last year’s levels,” said Jurij Puth, head of European origination at Blackstone Credit, adding that whether a process will go ahead often depends on the availability of financing.
Since Russia’s invasion of Ukraine, a seismic shift has occurred in European leveraged finance as the $1.5 trillion private credit market stepped in to fill the void left by banks dealing with billions in debt stuck on their balance sheets. With most of that so-called hung debt now sold and investors’ appetite revived, banks are making a comeback but could find it difficult to win back all the market share they lost to private credit, which is proving a resilient force.
Deal volume has also been hurt by surging borrowing costs in the U.S. and globally. Average yields on an LBO loan package now can easily exceed 10 percent compared with around 6 percent in January 2022, according to an April report from Carlyle Group Inc.
Private lenders and banks are jostling to provide about €500 million (about $541 million) in financing to back a potential sale of Wellspect HealthCare. Either a unitranche, a type of blended loan provided by private credit comprising senior and junior debt wrapped into one, or a term loan B, a more traditional financing underwritten by banks and sold on to institutional investors, are being considered.
Banks and public debt markets have notched some wins recently, even if most LBOs in the first quarter were funded with private credit. Cvent Holding Corp. is selling $900 million of bonds and loans in the broadly syndicated market to fund its buyout by Blackstone Inc. And Platinum Equity-backed Solenis is selling bonds and loans to help finance its buyout of Diversey Holdings, a maker of cleaning chemicals.
Fewer Deals
The competition between private credit and banks is all the more heated because, even with a pickup in activity in recent weeks, lenders are fighting over fewer deals. Acquisitions in Europe by private equity firms have dropped 84 percent this year to just $25 billion from the same period in 2022, data compiled by Bloomberg show. The slowdown is a continuation from last year, when buyouts fell by more than a fifth from the record set in 2021, as rising interest rates increased the cost of funding deals.
“Banks are offering underwrites for new deals again,” said Blackstone’s Puth, but “transactions which require a long time between signing of the commitment and funding are still difficult to price for banks.” Private credit “provides a more dependable alternative to this by giving certainty of both funding and pricing at the point of signing,” he added.
The syndicated market is traditionally cheaper than private credit, but banks get protection when underwriting a deal to give them room to increase pricing if a deal becomes tough to sell to investors. This means private credit — which typically requires a so-called illiquidity premium — often can come in at the same price.
Direct lending funds offer pricing certainty — as they don’t have the same protection that banks have — as well as speed of deal execution, without the need to get public ratings. They also help companies grow as they can borrow more debt quickly through add-on loans, a process that takes longer in the syndicated market given its diverse investor base.
Banks, on the other hand, are also able to offer revolving credit facilities, which companies need for tapping day-to-day liquidity and which private credit finds hard to provide.
