![]() ![]() ![]() ![]() Fortunately, credit facilities typically contain incremental (or “accordion”) provisions that allow borrowers to finance add-on acquisitions under existing financing agreements. Instead, the firm builds momentum around its new portfolio company like a snowball rolling downhill, expanding and growing the business through add-on acquisitions of complementary enterprises. What we don’t know is how private credit industry will react when they face the litmus test of souring loans.When a private equity shop acquires a new business, it rarely stops there. And they’ll undoubtedly become even more cautious as soon as there’s a spate of defaults on large leveraged loans. Moody’s warned that large banks will likely compete aggressively with private credit rivals to claw back the market share they’ve lost in the leveraged buyout market, and this could result in an erosion in pricing, terms and credit quality.Īll the same, the memory of recent losses means that the big US banks have been relatively cautious in agreeing to fund new buyouts. But the US veterinary hospital operator has also indicated it is open to the possibility of bank loans.īut it has rung alarm bells for credit ratings agency Moody’s which last month said that US banks’ renewed interest in financing leveraged buyouts could push them into a “race to the bottom” with private credit funds. Over the past decade, private lenders delivered average returns of 9 per cent, well above the miserably low yields offered by most debt investments.įor instance, the KKR-owned PetVet is holding talks with private credit funds as it looks to refinance more than $US3 billion in loans. These firms typically raise money from superannuation funds, insurers and wealthy individuals, who are attracted by the high returns on offer. “We are in the beginning of a secular shift in how credit is provided to businesses, and a shift that I believe will continue to gather speed,” Apollo chief executive Marc Rowan told analysts in August. Others – including Blue Owl Capital, HPS Investment Partners and Sixth Street Partners – were set up specifically to provide private debt. Some of the big players – including Apollo Global Management, Ares Management, Blackstone and KKR – started out in private equity or as alternative asset managers before moving into private credit. Private credit funds have been steadily expanding in the US corporate lending market since the 2008-09 financial crisis curbed banks’ appetite for risk. With banks becoming more wary, highly leveraged companies are increasingly turning to the $US1.5 trillion private credit industry for the fresh funding they desperately need to avoid default and messy bankruptcies. Meanwhile, the group of banks, led by Morgan Stanley, that provided some $US13 billion in bank debt as part of Elon Musk’s $US44 billion takeover of Twitter (now officially rebranded as X), have opted to park the loans on their balance sheet to avoid selling at a hefty loss. Parking loansįor instance, the group of Wall Street investment banks – including Goldman Sachs and Bank of America – that stitched together the financing for Elliott Management and Vista Equity Partners’ $US16.5 billion buyout of cloud computing company Citrix, were left nursing more than $US1 billion in losses when they sold the debt to investors at a steep discount. Many investors will be reluctant to see their money being used to rescue companies that are over-leveraged and underperforming, particularly if their fund is reaching the end of its life.Īt the same time, many large US banks have been stung by the heavy losses they’ve suffered from offloading the leveraged loans they agreed to underwrite before the era of cheap money came to a screaming halt last year. Some highly leveraged companies will be able to call on their investors – particularly if these are private equity sponsors – for extra equity which they can use to whittle down their debt burdens.īut there will be limits to the extent to which private equity firms will be willing to bail out troubled portfolio companies. Their revenues are coming under pressure as a slowing US economy dents their sales and squeezes their profit margins.Īt the same time, the steep rise in US interest rates since early 2022 means these companies are about to be hammered by a huge rise in borrowing costs on their massive debts. It’s not surprising that bankers are concerned, given that a staggering $US350 billion ($554 billion) of low-cost loans taken out by highly geared companies have to be refinanced in the next three years.īut these companies now find themselves in a bind. If there’s one thing senior bankers can agree upon, it’s that the next blow-up in global financial markets will be centred on the massive US leveraged loan market. ![]()
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