Private credit cuts pricing to fend off Wall Street deal grab

Jeenah Moon/Bloomberg

(Bloomberg) -- Private credit funds are pushing down their prices to keep contested deals from falling into the hands of Wall Street banks seeking to reassert their edge in lucrative leveraged lending.

The rivalry between upstart direct lenders and the likes of Goldman Sachs Group Inc. and Morgan Stanley is driving interest rate margins to new lows. Blackstone Inc. recently sought a $250 million loan at a rate of around 4.75 percentage points over the U.S. benchmark to finance its planned purchase of Rover Group, in what would be one of the cheapest private credit loans on record, according to data compiled by Bloomberg News.

Private lenders are prepared to offer Iris Software a loan at five percentage points over the UK benchmark, Bloomberg News previously reported. This is 75 basis points inside Adevinta's record loan in November, which was considered best-in-class pricing at the time. Ardonagh Group Ltd., in talks with private debt funds, may secure an even lower margin, according to people with knowledge of the matter, who asked not to be identified discussing a private transaction.

"Debt capital markets have started to recover and so there's a bit of pent-up demand coming through," said James Charalambides, head of European private credit at Adams Street Partners LLC. "It's just a function of lenders' appetite for deals and there's a lot of competition out there."

The cut-rate pricing is the latest salvo by private credit firms who were willing to lend through 2022's bear market when traditional lenders retreated. Now, with high-yield and leveraged-loan markets buoyant again on the prospect of easier monetary policy, large banks are ready to underwrite fresh leveraged buyouts.

"Suddenly private credit lenders in that space are seeing fierce competition from banks," said Alex Griffith, partner at law firm Proskauer Rose in London. "There is definitely a resurgence of other options for larger borrowers that haven't been available for 18 months."

Banks have begun trying to win back deals by sweetening terms and cutting pricing, including in the case of Wood Mackenzie, for which banks refinanced a $1.25 billion term loan that had been provided by HPS Investment Partners. The private equity owners of Neopharmed Gentili SpA are in talks with banks to refinance one of Italy's largest ever direct lending deals.

Meanwhile, JPMorgan Chase & Co. is leading the bulk of a $5 billion loan sale for Cotiviti Inc., with price discussions for a $4.4 billion floating-rate term loan at a margin of about 3.50 percentage points over the benchmark after undercutting private lenders.

In response, private credit firms including Blackstone, KKR & Co., and HPS, among others, are proactively repricing existing loans to keep them on the books, according to separate people with knowledge of the matter. Private equity sponsors are often demanding between 50 and 100 basis points of discount to keep the loans with the direct lenders, the people said.

Representatives for Blackstone and KKR declined to comment, while HPS and Ardonagh could not immediately be reached for comment. A representative for Madison Dearborn Partners, which alongside HPS is a major shareholder of Ardonagh, declined to comment.

"You're starting to hear about private credit lenders getting ahead of it in an attempt to retain good assets," Salman Mukhtar, managing director at Barings, said in an interview. "If private lenders can match their ask on pricing or get close to it, a sponsor would probably stay on the private side."