Private Debt News Issue #9: Regulatory Scrutiny, Strategic Shifts, and Mega-Deals (4.20.24)
From Moody's Warnings to Franklin Templeton's Private Markets Push – The Evolving Landscape of Private Credit
The private credit industry continues to navigate a complex landscape marked by heightened regulatory scrutiny, strategic shifts among traditional asset managers, and a steady stream of mega-deals. This week's Private Debt News examines the latest developments shaping the $1.7 trillion market, from Moody's warning on problem loans to Franklin Templeton's quiet emergence as a major force in private markets.
1. Acentra Health Slashes Interest Rate in $800 Million Private Debt Refinancing
In a sign of the intensifying competition between direct lenders and banks, Acentra Health LLC, a healthcare technology solutions company owned by Carlyle Group Inc., has secured a significant reduction in its borrowing costs through a private debt refinancing. The company, which previously had a margin of 6.5 percentage points above the Secured Overnight Financing Rate (SOFR) on its term loan, will now pay a margin of just 5.5 percentage points on a $666 million loan.
The transaction, led by Oak Hill Advisors, also included a $35 million incremental term loan priced at a discount of 98.5 cents and a $100 million delayed-draw term loan, both with the same 5.5-percentage-point margin over SOFR. The deal highlights the growing pressure on private credit firms to offer more competitive pricing and terms to retain market share in the face of renewed competition from traditional banks.
As borrowers increasingly seek to optimize their financing costs in the current environment, private credit managers will need to remain nimble and responsive to market conditions to maintain their edge and continue to attract high-quality deals.
2. Moody's Warns of Rising Problem Loans in Private Credit Funds
Moody's Ratings has sounded the alarm on deteriorating credit quality in the private credit industry, reducing its outlook for direct lending funds managed by BlackRock Inc., KKR & Co. alongside FS Investments, and Oaktree Capital Management from stable to negative. The move, which marks the first such action by Moody's in the sector since 2020, reflects the increasing number of loans on non-accrual status at these publicly traded business development companies (BDCs).
While the BDCs have retained their investment-grade ratings for now, the negative outlook signals the potential for downgrades to junk status in the medium term, which could increase borrowing costs and hurt returns for these funds. The warning from Moody's underscores the growing concerns among investors and regulators about the risks associated with the rapid growth of private credit, particularly in an environment of rising interest rates and economic uncertainty.
As the industry faces greater scrutiny and the prospect of more problem loans, private credit managers will need to demonstrate robust risk management practices, rigorous underwriting standards, and a commitment to transparency to maintain investor confidence and navigate potential challenges ahead.
3. Library Services Firms Mull Combining, Seek Private Debt Deal
In a potential consolidation play in the library services sector, Baker & Taylor and Media Source Inc. are exploring a combination and have approached direct lenders about financing the deal. Macquarie Group is working with the companies to secure debt for the combined entity, which is expected to have annual EBITDA of up to $25 million.
The potential transaction highlights the growing role of private credit in facilitating mergers and acquisitions among smaller companies that may not have access to the high-yield bond or leveraged loan markets. As traditional sources of financing remain constrained, particularly for middle-market businesses, private credit firms with the expertise and flexibility to structure bespoke solutions will be well-positioned to capitalize on these opportunities.
However, as the competition for deals intensifies and the pressure to deploy capital mounts, private credit managers will need to maintain a disciplined approach to underwriting and risk management to ensure the long-term success of their investments.
4. Wall Street Takes on New Role as Matchmaker to Private Credit
As private credit continues to gain market share in the leveraged finance space, Wall Street banks are adapting to the changing landscape by taking on a new role as matchmakers between smaller companies seeking loans and direct lenders eager to provide financing. Citigroup Inc. and Goldman Sachs Group Inc. are among the major players offering advisory services to connect corporate clients with private credit funds, capitalizing on their vast networks and expertise in deal structuring and execution.
The move reflects the growing convergence between traditional banking and private credit, as both sides seek to maintain their relevance and competitiveness in an evolving market. By leveraging their relationships and industry knowledge, banks can generate additional fees and maintain a foothold in the lucrative leveraged finance market, while private credit firms gain access to a broader pool of potential borrowers and the credibility associated with a major Wall Street firm.
As the lines between public and private markets continue to blur, the collaboration between banks and direct lenders is likely to deepen, reshaping the competitive dynamics of the industry and offering new opportunities for borrowers and investors alike.
5. Riverside Considers Sale of Private Credit Operation
The Riverside Company, a US private equity firm focused on control and non-control investments in growing businesses, is weighing strategic options for its direct lending arm, Riverside Credit Solutions, including a potential sale. The move comes amid a recent trend of asset managers and insurance companies seeking to expand their exposure to private credit firms.
The potential divestiture of Riverside Credit Solutions underscores the growing appetite for private credit assets among institutional investors, as they seek to diversify their portfolios and capture the attractive risk-adjusted returns offered by the asset class. For private equity firms like Riverside, the sale of a direct lending unit can provide a significant cash infusion and allow them to focus on their core competencies in equity investing.
As the demand for private credit continues to grow and the market becomes increasingly crowded, managers will need to differentiate themselves through specialized expertise, strong origination capabilities, and robust risk management frameworks to attract capital and generate compelling returns for their investors.
6. Apollo's Zelter Talks Up Private Credit to Australian Mega-Funds
James Zelter, Co-President of Apollo Global Management Inc., emphasized the growing importance of private credit in the evolving financial landscape during a recent appearance at the Asia Pacific Financial and Innovation Symposium in Melbourne. Zelter highlighted the "massive transition" underway in financial markets, as companies increasingly turn to private capital solutions, particularly in the credit space, as an alternative to traditional bank financing.
The comments come as Apollo continues to expand its presence in the Asia-Pacific region, having raised $35 billion from the area since the start of 2022. The firm's focus on attracting capital from insurers and institutions that handle money for retirees in Asia underscores the growing global appeal of private credit as an asset class.
However, as some investors begin to express caution around private credit amid signs of stress in the market, such as the impact of rapid interest rate hikes on corporate borrowers, managers will need to navigate the complex interplay of risks and opportunities to deliver sustainable returns and maintain investor confidence.
7. DWS Creates New 'Capital Solutions' Unit in Alternative Credit Division
In a strategic move to capitalize on the growth potential of private credit, German asset manager DWS has established a new capital solutions team within its alternative credit division. The unit, led by London-based Vlado Spasov, aims to complement DWS's existing initiatives in direct lending, leveraged loans, and structured credit.
The creation of the capital solutions team reflects DWS's broader ambitions to expand its €111 billion alternatives business, with alternative credit identified as a key target growth area. The firm has been actively investing in personnel and resources to support this strategic objective, as evidenced by the recent appointments of Dan Robinson as head of alternative credit for the EMEA region and European private credit specialist Roscoe Roman.
As traditional asset managers like DWS increasingly look to private credit to drive growth and diversify their offerings, the competition for talent and deal flow in the space is likely to intensify. Managers that can successfully navigate this dynamic landscape and deliver differentiated, value-added solutions to their clients will be well-positioned to capture market share and generate attractive returns.
8. Franklin Templeton's Quiet Emergence as a Major Force in Private Markets
Franklin Templeton, long known for its focus on traditional asset classes like stocks and bonds, has undergone a significant transformation in recent years, quietly becoming a major player in private markets. Through a series of strategic acquisitions, including private credit manager Benefit Street Partners, private real estate firm Clarion Partners, and European credit manager Alcentra, the 77-year-old asset manager now oversees more than $260 billion in alternative assets.
The pivot towards private markets reflects Franklin Templeton's efforts to adapt to the changing preferences of investors and combat the steady outflows from its legacy mutual fund business. By leveraging its extensive retail distribution network and long-standing relationships with financial advisors, the firm aims to bring the benefits of private market investing to a broader pool of individual investors.
However, the success of this strategy will depend on Franklin Templeton's ability to maintain the strong performance and distinct cultures of its acquired firms while navigating the challenges of integrating these businesses into a cohesive platform. As the lines between public and private markets continue to converge, traditional asset managers that can effectively bridge this divide and deliver compelling solutions to their clients will be well-positioned to thrive in the evolving investment landscape.
Conclusion
This week's Private Debt News highlights the complex and dynamic nature of the private credit market, as participants grapple with heightened regulatory scrutiny, strategic shifts among traditional asset managers, and the ever-present hunt for yield in an uncertain economic environment.
From Moody's warning on problem loans to Franklin Templeton's quiet emergence as a major force in private markets, the developments covered in this issue underscore the growing maturity and sophistication of the asset class, as well as the challenges and opportunities that lie ahead.
As the lines between public and private markets continue to blur and the competition for deals and talent intensifies, private credit managers will need to remain agile, disciplined, and focused on delivering differentiated value to their investors. Those that can successfully navigate the complex interplay of risks and opportunities while maintaining a commitment to transparency, rigorous underwriting, and robust risk management will be well-positioned to thrive in the evolving landscape of private credit.