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In the News

• January saw eye-popping numbers on priced broadly syndicated loan (BSL) deals, but a look behind thestats may tamp down some exuberance. The volume of deals priced in January hit $141.8 billion, a 272% increase from December's $52.2 billion, and the most ever tracked by LevFin Insights (going back to 2016). However, new-issue volume was only $20 billion, with the wide gap explained by the high volume of repricings—and demand fell short of that at $17.8 billion. Even so, dividend-related loan volume also jumped to $6.6 billion, from $840 million in December and a high water mark from November 2021. During the month, 50 loans tightened pricing during the syndication period, against 5 that widened, or 10.0:1, compared with 8:3:1 in December. These are the most borrower-friendly tallies since July 2023. The average all-in single-B clearing spread fell to S+396 (S+381/99.5 OID) in the month through January 23, from S+436 (S+407/99.1 OID) for all of December. Borrowers repriced $90.1 billion of loans in January, up from $18 billion in December and the most since January 2017. Not surprisingly, we saw a bump in amend-and-extend transactions for borrowers eager to hold on to the favorable pricing procured in the early part of the pandemic, with A&E transactional volume hitting $23.7 billion in January across 26 transactions, the highest amount since $29.6 billion in June 2022. The wave of repricings also lured B-minus-rated borrowers to cash in on the favorable conditions; they refinanced at a record pace and now account for about 26% of the $360 billion Morningstar LSTA US Leveraged Loan Index. These trends spurred U.S. institutional loans to trade above par for the first time since September 2021, at an average break price of 100.09% in January, up from 99.8 in December and 99.28 in November.
• Commercial real estate (CRE) has lost its luster for regional banks in the U.S.—and many investors around the world. Share prices collapsed at New York Community Bancorp (NYCB) and its debt rating was cut to “junk” by Moody’s, after it suffered $185 million in losses on only two property loans, eventually wiping out $4.5 billion from its market capitalization. These anxieties soon emerged throughout the global system, as Deutsche Bank raised its provisions for losses in U.S. CRE to €123 million, from €26 million a year ago; bonds issued by German real estate lender Deutsche Pfandbriegbank collapsed; share prices of Japan’s Aozora Bank fell 20% after it warned on a loss for the year on the back of weak overseas real estate loans; and three South Korean financial firms provisioned about $560 million to cover potential real estate losses. Smaller regional lenders are particularly exposed to the $560 billion in CRE maturities coming due by the end of 2025, with 28.7% of total assets at such lenders, compared with 6.5% at larger banks, and this chart from Reuters shows the CRE concentration ratios (total CRE exposure to total risk-based capital) of prominent regional banks in the U.S.—with several institutions posting a CRE concentration ratio (based on Q3 2023 data) in excess of 300%. Europe was not immune, as the European Securities and Markets Authority warned about a group of hedge funds’ exposure to mortgage bonds with an average gross leverage ratio of more than 2,000%. Both regulators and investors are sounding increasingly concerned about the exposure of regional banks to CRE loans. One in six fund managers now fear a systemic credit event, up from 1 in 11 in December. The same report also shows a 40% increase in the amount of U.S. commercial and multi-family real estate debt requiring refinancing or unloading in 2024, to $900 billion. Following New York Community Bancorp’s stumble, regulators have been reportedly asking other regional lenders about their exposures to and risks in the market. Indeed, about two dozen banks may require heightened scrutiny by regulators. And those banks that make it through 2024 in one piece have a collective hit to revenues of $35 billion to look forward to in 2025, courtesy of the Basel III endgame. But maybe it’s not as bad as all that (at least compared with the residential real estate downturn from 2007-09).
• January demonstrated renewed strength of the BSL market relative to private credit. The volume of private credit issued to repay BSLs fell to $1.8 billion, from $12.5 billion in 4Q 2023—and in fact more BSLs were used to take out private loans. Private lenders are trying to win back some of the market share lost in the BSL repricing wave described above, and to that end are beginning to compete more on pricing, according to Bloomberg. Private credit is targeting new markets, including family offices, the chief investment officers of which KKR polled and found that 45% intend to increase their allocations to private credit in 2024, and high net worth individual investors. Private lenders are also increasingly looking to private equity practices to fashion bespoke structures and terms for industries, including hiring healthcare experts, specializing in the green energy transition, making preemptive pitches to sponsors, and providing NAV-based financing and flexible terms like payment-in-kind (PIK) features. Another area in which private credit is becoming even more competitive is in credit tranching, which could open up private credit for inclusion in middle market CLOs. But Wall Street banks continued a trend that began at the end of 2023 as banks were lured from the hyper-competitive BSL market to smaller, private deals, leading to lower private debt prices. The traditional lenders are coming at private lenders where they live by offering flexible terms (such as PIK) and competing on price, in addition to moving into the private debt sector to scoop up sales on distressed debt—a practice that may bring mark-to-market transparency to the industry, an unwelcome development for some. One instance of the BSL-private credit dance is the growing use of hybrid structures in Europe, whereby high yield bonds or term loans are issued alongside private unitranche facilities. These close interactions, and ultimately competition, show no sign of letting up, as U.S. financial institutions have passed the $1 trillion threshold in loans to private lenders, up from about $894 million a year earlier. This 12% gain compares with a 2% gain for loans overall.
• The flexibility private credit provides borrowers, along with the Fed’s campaign to raise interest rates beginning in 2022, has bolstered the ongoing strength of the industry. Blue Owl sees private credit remaining competitive with banks, even if interest rates do come down, as “it’s always better than the alternative.” These bullish sentiments were echoed in reports issued by Alvarez & Marsal, which sees a rebound in dealmaking and fundraising activity in 2024, and Antares Capital, which stated that “the opportunity for prudently deploying new private debt capital remains quite favorable” in the middle markets, though it cautioned against a too-slight cushion of EBITDA-to-cash interest unless interest rates come down. For its part, Ares Capital warns of more “fixes” coming as borrowers’ liquidity needs are reliant on revolvers and cash, though Ares said the stress was “not severe.” One segment of the market that dealmakers are focused on as a source of megadeals is the lower middle market, though sourcing remains a challenge with companies that are family- or founder-owned. Also keep an eye out for consolidation among private credit lenders, as they seek economies of scale in chasing the relatively low fees earned in this space, according to Bain Capital. For now, however, the BSL markets are benefitting from the lower interest rates relative to private credit, picking up $10 billion in refinanced private deals so far this year, according to Bank of America.
• Bankruptcy and restructuring lawyers are looking ahead to a “good” year: large filers and crypto filings led to a heavy 2023, and 2024 may see more of the same on the back of retail (especially luxury) and commercial real estate (as further highlighted above). After a quiet January, the first two weeks of February saw an uptick in filings, with 22 cases, including eight large cases each in excess of $100 million in liabilities, six healthcare cases, and six real estate cases. By contrast, January was relatively sleepy, with 15 new filings (down 32% year on year and 29% from December). However, the writing was perhaps on the wall in January, as the speculative-grade corporate default rate rose to 5% for the trailing 12 months, the highest since April 2021, according to Moody’s, which predicts that this figure may be a high-water mark, with a return to 3.6% by the end of 2024. For its part, S&P sees the base case default rate falling to 4.75% over 80 defaults. According to S&P, consumer products companies were most represented of the 14 defaults in January, with four, followed by media and entertainment (three). Seven of the defaults were pinned on distressed exchanges.
• We can finally say without qualification: syndicated term loans are not securities, after the Supreme Court denied certiorari filed by Marc Kirschner, trustee for the Millennium Labs Litigation Trust. This leaves in place the decision by the US Court of Appeals for the 2nd Circuit, which affirmed a lower court’s rejection of that assertion (see here for our alert on this development). As you were, $3 trillion BSL market.

Quick roundup of recent new direct lender debt funds (and related updates):

• After two-year hiatus, private credit providers return to public share markets (LCD/PitchBook)
• Carlyle launches evergreen credit strategy for individual investors (Private Debt Investor)
• Banks, Private Lenders Eye Bundesliga Media Rights Funding (Bloomberg)
• Ares Raises $1.7 Billion for Australia Private Credit Fund (Bloomberg)
• PineBridge Private Credit Closes Third Direct Lending Fund (PineBridge)
• Fiera Private Debt Raises $350M in First Close of Seventh Vintage of its Flagship Private Credit Strategy (Reorg)
• Amundi Set to Challenge Direct-Lending Funds in Private Credit (Bloomberg)
• Charlesbank Raises $1.5 Billion Fund for Private Debt Investing (Bloomberg)
• Ambienta raises circa €250m for credit fund first close (Private Debt Investor)

Goodwin Insights – U.K. Crystal Ball Predictions

For this edition of Debt Download, we highlight the Goodwin Debt Finance team’s predictions for 2024 in leveraged finance in the United Kingdom. Here is a quick summary of what we are expecting:

The only thing you can be sure of in 2024 is that nobody knows what’s going to happen. Every think-piece you read has some fairly anodyne macro angle—“inflation is down, rates will follow” or “bank-led financing is dead”—which is quickly rendered irrelevant by blockbuster job numbers in the U.S. and a concomitant pause in monetary loosening (both in the U.S. and the U.K.) or, in the last few weeks, a large bank-led bond deal in place of a credit fund option, which we were told was 1000% going to get done.

Given the U.S. election looming in November, our best guess is that European PE finance markets will limp along in 2024—the phrase “survive until 2025” is being muttered on the street. Financing for good credits will continue to be easier to achieve than at the start of 2024, but we are unlikely to go back to the halcyon days of the pandemic (at least for the markets) and immediately post-pandemic sugar rush of loose monetary policy and system-wide FOMO. However, given the uncertain macro environment, the likely other themes in the PE financing markets are going to be a case of déjà vu all over again, and last year’s trends will persist; for example: 

1. bolt-ons and buy-and-build strategies will be a key focus for many sponsors until the conveyor belt of buy-out opportunities fully restarts; 
2. many financial sponsors will look at the secondaries space, continuation funds, NAV and the like to realize (at least in part) some of their investments; and
3. given the persistent environment of high rates, non-cash-pay debt (whether in the form of PIK or preferred equity instruments or simply a PIK toggle option in a unitranche financing) will continue to be a key area of focus, especially for high growth or tech companies.

One feature that may reappear if U.S. monetary loosening gets significantly ahead of central bank policy in London and continental Europe is the trend for Yankee financings, as was the case in the early to mid-2010s (i.e., deals which are underwritten in the U.S. credit markets—public or private—for companies without an obvious U.S. nexus). That being said, a key driver last time around was better flexibility in U.S. loan documentation, and we have seen a steady improvement/erosion (depending on your viewpoint) of documentation terms in European deals since then…

On that note, documentation will continue to favor sponsors and borrowers more generally—the much-vaunted snap back on terms to make them more lender-friendly, which was supposed to accompany the deal slow down, never arrived and terms are, broadly speaking, following the same trend as they have for the last 10 or so years—toward a more sponsor-friendly and “flexible” approach.

Last, but not least, credit funds are obviously here to stay. The golden age of private credit is not over yet.

In Case You Missed It – Check out these recent Goodwin publications:

Ten Considerations for Large-Cap and Upper-Middle-Market Borrowers in Early Stages of Distress; FinCEN Proposes AML Program Rule for Investment Advisers; CFPB Announces New Proposed Rule to Target Junk Fees; Federal Reserve Announces the Bank Term Funding Program will Cease Making New Loans as Scheduled on March 11; Playing the ‘What If’ Game When Reviewing Fintech–Bank Partnership Agreements; Federal Reserve Announces it Will Extend the Comment Period on its Interchange Fee Proposal Until May 12, 2024; SEC Adopts New Rules Applicable to SPACs, Shell Companies and Projections 

For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown.

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