This article was written by Abhinav Ramnarayan and Kat Hidalgo. It first appeared on Bloomberg Terminal.
Borrowers are increasingly swapping loans obtained from direct lenders for more affordable debt from Wall Street banks, benefiting from the ongoing recovery in credit markets.
According to Bank of America Corp. About $16 billion in debt has moved from private funds to the syndicated loan and bond markets this year. Thryv Holdings Inc., the owner of the Yellow Pages, and software company Encora Digital are some of the latest issuers to signal their preference for traditional leveraged loans.
As leveraged loan prices rise, companies that move public can secure lower interest rates and also shake off debt arrangements, which tend to be more onerous than syndicated arrangements. Many do this long before their private loans are due via call options, which can be triggered after just one year.
“Personal loans were more expensive for companies and came with more stringent requirements,” said Marina Cohen, high-yield portfolio manager at Amundi SA. “Now they can refinance on the public market at a lower cost, with looser terms and conditions, so competition for private loans is fiercer.”
The deals underscore how Wall Street banks are clawing back high-interest, high-fee loans that have been lost to the fast-growing $1.7 trillion private lending market in recent years. Leveraged loan prices near a 22-month high are benefiting banks, allowing them to lend to businesses at cheaper rates than direct lenders can offer.
It’s the latest setback for private lenders, which face increasing competition from traditional banks with greater risk appetites amid buoyant markets.
Already this year, banks won controversial deals, including Wood Mackenzie and Cotiviti Inc. The banks also managed to take Ardonagh Group Ltd. to divert nearly half of a $5 billion financing that private lenders had arranged to the broad syndicated market.
In response, private credit funds are reducing conditions and reducing prices. Traditionally, personal loans could charge around 6 to 7 percentage points above the base interest rate, but this has fallen significantly in recent months. Earlier this year, Blackstone Inc. secured a $250 million loan at an interest rate about 4.75 percentage points above the U.S. benchmark to finance its purchase of Rover Group – one of the cheapest, according to data compiled by Interest rates ever recorded for a personal loan loan Bloomberg News.
Of course, not every impending maturity company can quickly transition to public markets. Syndicated loans to a large group take longer to complete than quick private loan deals.
As direct lenders try to compete on pricing, banks are resorting to tactics favored by their private lending rivals, including offering extended-term loans and benefit-in-kind arrangements that allow companies to delay interest payments.
The rivalry has at least one clear winner: buyout firms, which negotiate lower interest rates and more favorable terms in competition between public and private lenders.
“From the issuer’s perspective, this ability to choose one market or another depending on price and market conditions is positive, especially in times of higher interest rates,” said Raphael Thuin, head of capital market strategies at Tikehau Capital, which has both public and private credit departments.
Thoma Bravo is taking advantage of competition by asking private lenders to cut prices on the debt package used to finance its acquisition of Coupa Software Inc. by 2 percentage points to 5.5 percentage points above the secured overnight financing rate, according to Bloomberg News previously reported.
Others fear that standards could fall by the wayside in the dispute over deals and that investors could find themselves on the losing side.
“Public markets have begun to regain share of private credit,” Barclays Plc analysts Bradley Rogoff and Corry Short wrote in a note this week. “But as competition intensifies, too much capital chasing too few deals fuels concerns about mispriced risks and a deterioration in investor protection.”