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Direct lenders are becoming more aggressive, seizing a larger percentage of buyouts | Green Day Online

More companies are turning to direct lenders to fund a wave of buyouts fuelled by private equity. Direct lenders can provide dry powder at a faster pace, making deals more desirable to potential lenders such as Greenday guarantee.

One of the most well-known instances is Thoma Bravo’s 10.7 billion dollars take-private deal with San Francisco-based software company Anaplan in March. The tech-focused PE firm snagged 2.6billion dollars in credit from a consortium of direct lenders comprising Blackstone Credit, Apollo Global Management, Owl Rock Capital, and Golub Capital within some days. Thoma Bravo steered clear of leveraged loan finance and other sectors that have traditionally specialized in big loans for leveraged buyouts.

Direct lenders are expected to acquire market share in the financing of significant PE projects in the coming years, and they might be a viable alternative to high-yield bonds and traditional bank syndicated loans.

Private equity is robust through the first quarter of the year, as investors take advantage of the lower value of assets on the market to buy assets.

The syndicated market has been taking an increasingly cautious approach to the evaluation of credit risks against the headwinds of rising rates of interest, political tensions, and inflation, as they look to increase rates and more flexible contract clauses. This is often a source of uncertainties in the syndicating process.

The problem of junk-rated loans on the market has decreased this year because of the incursion by Russia within Ukraine. The volume of leveraged loans during February was $28.7billion, which is contrasted to $71.6billion the previous year according to data from the LCD, a subsidiary that belongs to S&P Global.

While others retreat from potentially problematic parts of the credit market, private investors can profit from possibilities and fill in a gap.

Direct lending agreements are an extremely popular option for the lenders and the sponsors due to their speedy closing and offer greater security and confidence when it comes to the execution. In comparison to syndicated loans, they also have reduced underwriting fees, making them more appealing.

“Even though they were initially planning a widely syndicated loan, financial sponsors began to conduct a dual-track process in the last few weeks while preparing to secure debt financing for deals,” said JakeMincemoyer, head of Allen Overy’s US leveraged finance group. “Sponsors and firms were attempting to compare prospective transaction conditions provided in the market with what could be accomplished through a privately issued unitranche loan,” says one source.

In addition, certain types of debt aren’t easy to access through the market for syndicated loans, which opens the door to private lenders.

Term loans, which include a drawing delay and allow a borrower to withdraw funds at a specific period, are an excellent illustration of this. It’s a key technique for buy-and-build plans that demand a lot of dry powder to respond fast and efficiently to new acquisitions.

However, given the current economic context, concluding these deals in the syndicated credit market is seen as more costly and time-consuming.

“All of these benefits much outweigh a modest amount of added cost [paid by private loans],” GregoryCashman, head of direct lending at GolubCapital, a direct lender with over $45billion in capital under the management, stated.

Furthermore, due to the vast amount of dry powder that has collected over the previous few decades, direct lenders may be able to compete with banks and, in some cases, even outperform them by providing money through loans to major buyouts.

There are several multibillion-dollar unitranche loans available. This wasn’t something you saw very regularly a few years ago. A few high-end private lending businesses, as well as company development organizations, often give these loans.

Thoma Bravo used private borrowing to cover its $6.6 billion acquisition during the previous quarter.

In another situation, Bloomberg reported that KKR has approached private credit banks and other organizations in an attempt to buy Spanish health clinics’ company Ivirma Global.

Direct lenders must reduce covenants in order to compete on projects of significant value.

According to Eric Klar, co-head of White & Case’s US private credit and direct lending division, “more direct loan agreements are designed in a covenant-lite way to allow them to compete,” whereas “traditional direct lenders were required to possess credit facilities and sign a financial covenant that was reviewed at the end of each fiscal quarter.”

Klar spoke about the necessity of using financial covenants that have the springing effect as an example. In these terms, the covenants are only put in force after a borrower has used its Revolving credit facility up to a level of a certain threshold. Additionally, the covenants only exist to safeguard those who have provided the revolver, or sometimes the term loans lenders.