The giants of private credit — the only game in town lately for
big-ticket leveraged buyouts — are dialing back on risk, in a turning
point that threatens to reduce crucial financing for mega deals.
Blackstone Inc., Apollo Global Management Inc., Ares Management Corp.,
KKR & Co., Antares Capital LP, and the asset management arm of Goldman
Sachs Group Inc. are cutting the amount of debt they’re providing per
deal as recession risk rises, according to people with knowledge of
the matter who isn’t authorized to speak publicly. They’re also asking
for, and getting, higher yields on financing packages with less
leverage, while commanding stronger investor protections in case
corporate borrowers go under, the people said.
In the first half of the year, these private credit firms were willing
to band together to provide as much as $5 billion, or even $7 billion,
of debt for an acquisition. That has dwindled to around $2 billion for
the unitranche loan portion, said one of the people, though such a
figure remains large by historic standards.
The more cautious tone among the big direct lenders worsens the
climate for debt-fueled corporate acquisitions and LBOs, both of which
have already seen a drastic slowdown this year.
“It’s definitely a challenging market. We continue to assess each deal
based on its merits,” said Carol Ann Wharton, a spokesperson for
Representatives for Blackstone, Apollo, Ares, KKR, and Goldman Sachs
declined to comment.
There are key differences in the risk appetite between each firm. But
broadly speaking these direct lenders, who had been willing to hold
about $500 million on their books for deals earlier this year, have
cut that to $200 million to $300 million, said the people.
Firms that routinely held more than $1 billion of financing are
cutting back on their hold size as well, they said. Fees for
underwritten transactions have also increased to a range of 3% to 3.5%
from about 2% to 3%, said one of the people.
With the high-yield bond and leveraged loan markets in the US and
Europe under immense strain, private credit funds have emerged as
crucial players in power mergers and acquisitions activity. At the
same time, banks have stepped back after taking losses on bonds and
loans they have brought recently to the market.
Read more: Debt Losses for Buyouts Top $1 Billion and Banks Brace for More
As recently as June, a group led by Blackstone provided about $5
billion of debt, one of the biggest seen in direct lending, to help
fund the leveraged buyout of software maker Zendesk Inc. Around May,
lenders including Blackstone and Ares offered a $4.5 billion
unitranche loan, a popular structure for private credit that blends
senior and junior debt into one, to fund a majority stake in
Information Resources Inc.
Now with the Federal Reserve ramping up interest rates to tighten
financial conditions, these lenders are paring back risk. Spreads have
widened by 50 basis points to 150 basis points from a month ago, on
top of the rise in the benchmark rate, the people said. Leverage has
declined by half a turn, or 0.5-times less debt compared to earnings
before interest, tax, depreciation, and amortization, or Ebitda said
On the current trajectory, private equity firms would have to find
more lenders than they had previously for the same amount of
financing. And with higher borrowing costs and less debt for
acquisitions, they may be prompted to lower purchase prices, in what
could be the biggest challenge yet to the M&A cycle this year.