A fresh showdown is emerging between banks and private credit funds as they head to finance deals in a nascent recovery in European leveraged buyouts.
Nobody JPMorgan Asset said its markets are right to be on the ups and downs of the US rate cuts.
Banks and direct lenders are looking to put billions of euros of loans to work financing potential acquisitions that have cropped up in recent days, of companies such as Dechra Pharmaceuticals plc, Constantia Flexibles and Civica.
activity levels are topping up across Europe but remain below last year s levels, said Jurij Puth, head of European origination at Blackstone Credit.
Since Russia's invasion of Ukraine, a seismic shift in European leveraged finance has occurred, as the $1.5 trillion private credit market stepped in to fill the void left by banks dealing with billions of debt stuck on their balance sheets. With most of that so-called hung debt now sold and investors' appetite revived, banks are making a comeback but could find it difficult to gain back all the market share they lost to private credit, which is proving a robust force.
The two sets of lenders are also grappling to provide about €500 million to $541 million in financing for a potential sale of Wellspect HealthCare. Either a unitranche, a type of blended loan provided by private credit, covering senior and junior debt, or a term loan B, a more traditional financing underwritten by banks and sold to institutional investors, is being considered.
Providing financial assistance for private equity buyouts is attractive for lenders, as they are one of the few investment banking firms that pay sizable fees. With both funding markets on private equity's speed dials, banks and private credit funds are ready to make the case for why they are the right avenue to pursue when financing a potential acquisition.
Even with a rise in activity in recent weeks, lenders are grappling with fewer deals. Acquisitions in Europe by private equity firms have dropped 84% this year, to just $25 billion from the same period in 2022, according to data compiled by Bloomberg. The slowdown is a repeat of last year, when buyouts fell by more than a fifth from the record set in 2021, as interest rates increased the cost of funding deals.
Banks are offering underwriters for new deals again, Blackstone s Puth said, but transactions which require a long time between signing of the commitment and funding are still difficult to price for banks. Private credit provides a more dependable option to this by giving certainty of both funding and price at the time of signing, he said.
Banks typically charge less than private credit, but banks get protection when subscribing a deal to provide them with room to increase prices if a deal becomes tough to sell to investors. This means private credit - typically requires a so-called illiquidity premium - often comes at the same price.
Direct lending funds offer price certainty - as they don't have the same protection as banks - as well as speed of deal execution, without the need for public ratings. Companies can borrow more debt quickly through add-on loans, a process that takes longer in the syndicated market given its diverse investor base.
Banks, on the other hand, are able to offer revolving credit, which firms need to tap day-to-day liquidity and which private credit finds difficult to provide.