USA Trends and Developments Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
Rebound: Syndicated loan market challenges private credit deals The resurgence of the syndicated loan market from its post-COVID-19 lull is poised to signifi - cantly impact private credit deals, giving spon - sors and borrowers more viable options and reshaping the dynamics between these two asset classes. The syndicated loan market, traditionally domi - nated by banks arranging deals syndicated to collateralised loan obligation (CLO) investors, is experiencing a more favourable macroeconomic environment, characterised by cooling inflation - ary pressures and modest interest rate decreas - es. Increased loan volumes and demand from CLOs are leading to tighter pricing, incentivising sponsors and borrowers to consider syndicated loans to refinance existing private debt platforms and fund new acquisition platforms. The syndicated loan market’s resurgence has led to the compression of spreads for private credit deals to stay competitive. As arrangers re-enter the market with competitive pricing (often even when fully accounting for any flex provisions), private credit providers that want to continue to deploy large volumes of capital may need to adjust their pricing strategies to remain attractive to borrowers. This could lead to a narrowing of the yield differential between syndicated loans and private credit and also lead to convergence on terms, potentially affecting the alpha offered by private credit that is so attractive to investors. Companies that previously relied on private credit due to its flexibility and speed of execu - tion may now consider syndicated loans as a viable alternative, especially for larger transac - tions, particularly if arrangers can work to reduce the time between committing to the deal and getting the deal printed on screens for lenders.
This shift to faster marketing and smoother exe - cution could result in a more competitive land - scape, with private credit providers needing to differentiate themselves through innovative deal structures and value-added services. This increase in syndicated loans may drive pri - vate credit funds to establish partnerships with banks. Liability management in private credit Liability management transactions are increas - ingly becoming a market practice that the pri - vate credit markets cannot ignore, offering both challenges and opportunities for lenders and borrowers. Before the rapid expansion of the private credit market, single lender or small club deals domi - nated the private credit market, largely with tight underwriting and conservative documentation, leading to limited scope for lender-on-lender conflict and liability management generally. The expansion of the private credit market and the increased competition brought on by new mar - ket entrants has led to more flexible documenta - tion standards and larger clubs. This has in turn created the conditions for liability management transactions more usually seen in the bond and syndicated markets to cross over into the private credit space. The very public disclosures in the financial press in mid-2024 of drop-down transactions in pri - vate credit has led to increased scrutiny by lim - ited partners (LPs) of private credit underwriting, terms, and marks in portfolios. This scrutiny has in turn led to an increased focus on documenta - tion and covenants. As companies restructure their debt, they may seek new financing to support their revised capi -
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