Written by Saeed Azhar and Tatiana Bautzer
NEW YORK (Reuters) – Over the past two years, Wall Street banks have swung by the dozens to re-loan companies in debt-backed deals as big private equity and asset management firms have moved into the business. It has raised billions of dollars.
U.S. banks reduced lending to lower-quality corporate borrowers in 2022 as the Federal Reserve aggressively raised interest rates. Rising borrowing costs also derailed trading markets, particularly those supported by high levels of debt.
Credit markets recovered after the Federal Reserve suspended monetary tightening late last year, encouraging banks to return to leveraged financing, which uses their own capital and outside institutional funding to expand private credit operations.
The $1.5 trillion broad syndicated loan market has already grown this year, according to Chris Long, founder and CEO of Kansas City-based credit management firm Palmer Square Capital Management. It is said to be making a comeback. His private equity firm, KKR's, whose direct lending market is about half the size of the syndicated market, bankers estimate, has bid to acquire healthcare technology company Cotiviti Inc. from Veritas Capital. Increasing competition to finance potential deals highlights overlapping relationships in the era of private credit. KKR, a leading candidate to acquire a 50% stake in Cotiviti, is in talks with both a syndicate of banks and a group of private creditors to fund a deal that would value Cotiviti between $10 billion and $11 billion. A source close to the matter said.
KKR is leaning toward a banking syndicate to fund the deal, one of the people said. KKR declined to comment.
Meanwhile, private credit companies are also entering activities that were once a monopoly of local banks. Investment companies are expanding their lending business beyond loan transactions and moving into consumer lending and real estate.
PacWest Bancorp sold its $3.54 billion lender finance portfolio to asset manager Ares Management last year. KKR acquired a $373 million portfolio of prime auto loans from Synovus Bank and a $7.2 billion portfolio of super prime recreational vehicle loans from a division of BMO Financial Group.
The markets for syndicated loans and private credit “will converge and become more similar over time,” said Kevin Foley, global head of debt capital markets at JPMorgan Chase, the largest U.S. lender. said.
“It's not new to us,” Foley said. “We are agnostic and want the right solution for our clients.”
JPMorgan Chase & Co. has set aside $10 billion of its own funds for private credit, but that could increase significantly depending on demand, the people said, asking not to be identified discussing financial details. The bank has also received inquiries from potential partners who would like to bring in private capital for financing, one of the people said, and the bank is convening deals.
Long, who founded a business development company specializing in credit in January, said private credit “continues to grow as private equity firms increasingly choose that route to finance deals.” Stated.
JPMorgan's Mr. Foley said the amount raised will depend on the merger and acquisition and whether the participants can agree on a price.
“The gap between buyer and seller expectations is narrowing, but that will also depend on confidence in the economic situation,” he said.
direct lender
Banks in the syndicated loan market compete with direct lenders such as private equity firms.
“Direct lenders have grown to the point where they can legitimately compete with syndicated banks for large transactions,” said Greg Olafson, global head of private credit at Goldman Sachs.
Goldman has been active in the private credit business for nearly 30 years through its asset management division, which collects client funds and lends them out for a profit. He aims to raise $40 billion to $50 billion in alternative financing this year, with private credit accounting for a large portion of the total.
Goldman raised $23 billion in private credit last year, and its property and wealth division manages $110 billion in private credit funds.
Anna Althoff, global head of private credit and financial institutions at Moody's Investors Service, said that as investors and asset managers play a larger role in lending, they are not as highly regulated as banks, so they face potential risks. may become ambiguous.
“Transparency is important and we would like to see more information about the financing, which balance sheet these credits are on, how the portfolio is performing, etc.” “It would be useful to compare arrears in the private credit sector with publicly syndicated loans.”
Direct lending is also fostering new partnerships. Wells Fargo has partnered with private equity firm Centerbridge Partners to create a business focused on direct lending to mid-market, family-owned and privately held companies in North America.
“Our first thought was to provide middle-market clients with a different and “The question was how do we provide access to forms of financing?”
“It wasn't, 'How do we get private credit?'” As customer expectations were changing, we decided to form a relationship with Centerbridge. ” Loans from private lenders trade at a premium over traditional syndicated loans because the borrowers are riskier and the underlying loans are harder to sell to other participants, industry executives and analysts say. It is said that this is often done.
“Private credit has a consistent premium relative to public markets, averaging several hundred basis points,” said David Miller, global head of private credit equity at Morgan Stanley. As the market grows, that premium tends to tighten.”
But in the long run, private credit markets will remain expensive and illiquid compared to public markets, he said. “There are limits to spread compression.”
(Reporting by Saeed Azhar and Tatiana Bautzer; Additional reporting by Nupur Anand and Matt Tracy; Editing by Lananh Nguyen)
