Moment for direct lending extends as volatility reduces leveraged lending

The rise of direct lending as an alternative to bank lending has meant speed and efficiency, two factors never more in demand given recent market volatility. The financing vehicles that have come into fashion during Covid may well become a permanent fixture in the deal constellation as additional volatility sets in.

In contrast to the uncertain pricing of leveraged loan markets, 70% of private credit providers surveyed by Baird said they do not require a pricing premium on loans to businesses with no direct business in Russia. The covenants also remain largely unchanged. This makes direct lenders more competitive, just as premiums increase on bank loans. Thoma Bravo would have turned to Credit Blackstone, Golub Capital, Owl Rock Capital and world apollo to fund its proposed $10.7 billion acquisition of Anaplan because the target’s negative cash flows were a tough sell to banks in a rising interest rate environment.

Could this create an opportunity for direct lenders? Remember that the shift from private equity to direct lenders during the pandemic has given credit funds access to offers that would have been out of reach in normal times. A credit fund manager cites a recent example: A summer camp operator who had to shut down during Covid came to the market looking for debt to ride out the pandemic, but found themselves excluded from traditional lending markets by banks that did not want to lend. With a large footprint and a normalized Ebitda of $1 million, the company was not the kind of company that would normally need capital. The fund stepped in and ramped up its operations until the summer of 2021, when the company had its best year ever.

There may well be similar gains for direct lenders in the coming months as volatility increases the attractiveness of terms provided by credit funds.

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