The accelerating pace of large-scale direct lending deals this year, including a raft of billion-dollar plus unitranche loans, underscores the depth and maturity of the private credit market. It also reflects a drop in bank appetite for risk.
The uptick comes at a time when increased execution risk in the broadly syndicated loan market—where leveraged borrowers have traditionally raised funding—is prompting private equity sponsors to seek certainty in the arms of direct lenders.
“Direct lenders have become incredibly valuable,” said one private credit investor. “Sponsors are not willing to bet on the uncertainty in the broadly syndicated loan market right now.”
Year-to-date at least a dozen unitranche loans sized at US$500m or more have been arranged by direct lenders, according to public and private data tracked by Refinitiv LPC, roughly double the seven deals completed in all of 2018.
In this latest example, the US$1.6bn unitranche loan, which includes a US$400m delayed draw component, was provided by administrative agent Golub Capital, together with Goldman Sachs, Apollo Global Management, KKR, Oak Hill Advisors (OHA), Ares, Carlyle, Owl Rock Capital Partners, Antares Capital and Partners Group, according to sources familiar with the transaction. The company also lined up a US$50m revolving credit facility.
The unitranche loan priced at 550bp over Libor. Proceeds are slated to refinance the company’s exisitng capital structure, including a first-lien term loan priced at 425bp over Libor.
“People really liked the company and the opportunity to get really good allocations in a credit they like with a sponsor they know,” the direct lender said.
Risk Strategies is a portfolio company of Kelso. The private equity sponsor acquired a majority stake in the brokerage firm in 2015 from Kohlberg & Company. On October 29, Risk Strategies said in a release that it acquired Dash & Love Inc, a specialty brokerage based outside of Philiadelphia. Terms of the acquisition were not disclosed.
Representatives for Golub, KKR, Carlyle, Owl Rock, Antares, Partners, Kelso and Risk Strategies declined to comment. Representatives for Goldman Sachs, Apollo, Ares and OHA were not immediately available.
OPPORTUNITY KNOCKS
Private credit is no longer solely the domain of small to mid-sized companies and direct lenders are benefitting from the repricing of risk in the broader loan market.
Sponsors are increasingly turning to direct lenders to fund large sized transactions with unitranche loans. The structure, which combines senior and subordinated risk into a single tranche of debt, is favored for its certainty and ease of exectution.
Direct lenders said sponsors are regularly showing them deals before going to bank arrangers or at the same time, and they expect the dynamic to continue.
A record US$10.7bn in unitranche loans was booked in the third quarter, surpassing the US$9.2bn tally for the second quarter.
Last quarter, Integrity Marketing Group, which sells life and health insurance products to the senior market, raised a US$945m unitranche loan in a deal backing private equity firm Harvest Partners’ strategic growth investment in the company. Owl Rock, Crescent Cpital and Antares provided the loan.
Earlier in the summer, ION Group tapped Goldman Sachs Private Credit and HPS to provide a US$1.25bn untiranche loan for its takeover of financial media and data firm Acuris, and Golub provided a US$950m unitranche loan to cloud-based supply chain management company E2open to buy Amber Road.
Typically unitranche loans have been used to finance private equity-backed mergers and acquisitions for small and mid-sized companies, but more than 40% of last quarter’s unitranche volume was arranged for large borrowers.
As direct lenders explained, if before they were focused on US$30m Ebitda companies, now US$100m Ebitda companies are in play.
With a significant group of private credit players able to hold positions of roughly US$100m in a single transaction, it is easier than ever to club up a billion-dollar plus loan among a group of buy and hold investors.
Nor is the broadly syndicated market currently offering any meaningful pricing discount relative to the direct lending market. At least 17 companies tapping the broadly sydnciated market in September and October saw pricing flex up, all of them single-B rated borrowers, after investors demanded higher yields to invest.
In a dislocated market, the ability of direct lenders to move quickly and offer competitive terms mitigates certain factors, including pricing and flex risk. The direct lending deals also do not require ratings. A sponsor may pay up incrementally in the direct lending market, but sponsors are willing to swallow that to lock in pricing.
In other words, sponsors know what terms they are going to get, and that is an attractive proposition.