Direct lending’s rise as an alternative to bank loans has turned on speed and efficiency, two factors never more in demand given recent market volatility. The financing vehicles that came into vogue during Covid could well become a permanent part of the dealmaking constellation as additional volatility sets in.
Unlike leverage loan markets pricing in uncertainty, 70 percent of private credit providers surveyed by Baird said they were not requiring a pricing premium on loans to companies without direct business in Russia. Covenants are also largely remaining unchanged. That makes direct lenders more competitive just as premiums climb across bank loans. Thoma Bravo reportedly turned to Blackstone Credit, Golub Capital, Owl Rock Capital and Apollo Global to finance its $10.7 billion proposed acquisition of Anaplan because the target’s negative cash flow was a hard sell to banks in a rising interest rate environment.
Could that create an opportunity for direct lenders? Remember, private equity’s turn toward direct lenders during the pandemic gave credit funds access to deals that would have been out of reach in normal times. One credit fund manager points to a recent example: An overnight summer camp operator that had to close during Covid came to market looking for debt to ride out the pandemic, but found itself shut out of traditional lending markets by banks unwilling to lend. With a wide footprint and $1 million in normalized Ebitda, the company wasn’t the sort of firm that would normally need capital. The fund stepped in and shored up operations through to summer 2021, when the company had its best year ever.
There could well be similar wins for direct lenders in the months ahead as volatility increases the attractiveness of terms provided by credit funds.