Disruption in the private lending sector is driving companies toward traditional bank-led loan arrangements, as borrowers discover significant savings even while banks demand debt reduction from highly leveraged firms.
Companies seeking risky financing are finding bank-led syndicated loans approximately 200 basis points less expensive than direct lending options offered by non-bank institutions, according to two banking professionals who spoke with Reuters about below-investment-grade loan markets. This substantial cost difference makes switching markets worthwhile, senior loan officers confirmed, noting that several borrowers have already made or are contemplating such moves.
This shift toward syndicated lending suggests banks may be gaining advantage amid private credit market instability, where fundraising has decreased and investor withdrawals have increased.
“If public markets are open, and your credit profile is strong, there’s a real case for tapping the BLS (broadly syndicated loan) market,” said Marc Pinto, global head of private credit for Moody’s Ratings. “You get liquidity, price discovery, and the ability to refinance down the road.”
Interest rate spreads started expanding in late 2023 due to concerns about artificial intelligence disrupting software-focused investment portfolios and mounting pressure on medium-sized borrowers. This pushed direct lending loan spreads to 550-600 basis points above the Secured Overnight Financing Rate (SOFR), while junk loan spreads in public markets averaged 350-400 basis points over SOFR, banking sources reported.
Four transactions totaling $4.3 billion have already shifted from direct lending to syndicated markets this year, with many more discussions underway, according to one source sharing internal industry information who declined to elaborate on specifics.
Another banker reported ongoing negotiations with sponsors seeking to refinance portfolio companies that previously used direct lending through broadly syndicated markets instead.
This borrower migration from private credit to broadly syndicated markets remains in preliminary phases. Although syndicated loans typically cost less than direct loans on average, the pricing gap has been especially notable this year, according to banking professionals and industry statistics.
Syndicated loan market data has not yet reflected any trend changes, with the broadly syndicated loan sector maintaining approximately $1.55 trillion in size through the first quarter, PitchBook data indicates.
While recent direct lending deal values were not immediately accessible, the quantity of direct lending transactions dropped sharply compared to last year. First quarter direct lending deals fell to 104 from 216 in the same 2024 period, according to Preqin data from BlackRock.
Alternative investment fundraising, including direct lending, reached approximately $15.0 billion in March 2024, declining 5% from February and 18% below previous year levels, Robert A. Stanger & Co reported. The firm attributed much of this decrease to continued slowdown in Business Development Company (BDC) fundraising. BDCs are investment vehicles that provide direct loans to numerous mid-sized companies.
Companies will likely continue evaluating both markets based on their specific requirements.
“While some borrowers may be drawn to the syndicated market because of pricing differentials, the decision is rarely driven by rate alone,” said Sheel Patel, head of New York Private Credit at Mayer Brown.
“Borrowers are also weighing execution risk, timing, flexibility, certainty of capital and the ability to work through downside scenarios.”
These conversations remain preliminary since the first major wave of loan maturities for software and technology companies from BDCs will not arrive until 2028, PitchBook data shows. BDCs include both publicly traded and private funds that provide loans to private companies.
Approximately $6.15 billion in BDC software company loans mature next year, representing roughly 5% of BDC software debt, the data reveals. This amount increases to $20.6 billion, or 18% of BDC software debt, coming due in 2028.
Borrowers working with banks face the challenge that certain sectors carry higher leverage than others, prompting bankers to encourage companies to strengthen their debt profiles before entering new refinancing cycles, banking sources explained.
Some banks are requesting companies raise capital through preferred equity to strengthen balance sheets without causing the dilution associated with common stock offerings, one banker noted.
As borrowers move from direct lenders to banks, remaining opportunities for private credit lenders have become significantly more competitive, according to Angela Hagerman, a debt finance partner at Reed Smith law firm.
“They’re willing to drop the pricing down (and) loosen some of the covenants…In general, they’re willing to be more flexible and truly compete with the traditional bank lender market,” Hagerman explained.
Banking professionals described the private credit market as experiencing dislocation due to increasing redemption pressure and declining share values of alternative asset management companies, causing more cautious capital deployment.
During the recent $5.75 billion loan sale by banks to finance Electronic Arts’ leveraged buyout, several private credit funds either withdrew orders or reduced them, according to one unnamed source. Private credit funds typically invest excess capital in syndicated loan transactions, bankers noted. Electronic Arts declined comment.
“Private credit lenders, particularly the BDCs managers, are becoming more choosy,” said Moody’s Pinto. “With respect to high yield spreads, if it is too tight, then it’s not right. That might not sit well with borrowers that have options.”
