Credit Conditions | June 2024 - McDermott Will & Emery

Credit Conditions | June 2024

Overview


Welcome to this edition of Credit Conditions, a quarterly publication from McDermott Will & Emery that analyzes recent debt market trends.

In Depth


Key Debt Market Trends

Interest Rates

Private Equity and M&A

Private Credit vs. BSL

Blurring Lines

  • Private credit and bank financing are further converging as banks have begun partnering with existing private credit lenders or launching their own private credit initiatives. Part of the appeal for private credit has been access to nonsponsored borrower relationships and new asset-backed debt as an asset class, which previously were dominated by bank lenders. Banks have been seeking out private credit, in part, to source third-party funding since Basel III and other stricter bank regulations to which private credit lenders are subject are making it harder for banks to lend off their balance sheets. The partnerships also benefit both banks and private credit as dual-track deals showing a syndicated option, a private credit option and a hybrid option have gained traction with sponsors looking for optionality in the early stages of a financing transaction and are expected to become more important going forward.

Adjacent Structures

  • Limited financing activity relative to dry powder, combined with the inherent difficulty in further financing certain over-levered structures, has led borrowers and lenders to explore a variety of financing types, from fund finance and NAV facilities to factoring facilities and even deeply structured instruments that share features of both debt and equity products. This increased complexity will need careful consideration from both a credit and a legal perspective, but the creative nature of this thinking lends heavily to private credit, which can show both terms and structuring flexibility to drive solutions.

Crossing Borders

  • The growing trend of US institutions transacting in the European market, either from their US homes or from European offices, has continued across both private equity and private credit. This growing opportunity for lenders to follow their sponsor relationships has also led to an increased conflation across terms not seen quite so starkly since the advent of the Yankee Loan. In particular, Spain, Italy and other European markets that were considered more challenging for transactions – because of a banking monopoly, insolvency or applicable collateral regimes – are now ripe for investment, driving an increased tightening on terms and economics in what is already an increasingly hot market. As institutions become even more comfortable with navigating the regulatory landscapes, activity from US funds in Europe will likely continue to grow.

Diminishing Distress?

Key Debt Market Data on CreditSights