Banks are currently feeling stronger than they have for a long time, and are now challenging private debt funds to a duel. The banks are drawing their confidence from the liquid debt capital markets, which were significantly more receptive in the first quarter than in recent years. For example, in December 2022 software company Personal & Informatik (P&I), owned by private equity investor Hg Capital, did a private debt placement. This was recently refinanced with a 455 million euro syndicated bank loan with a five-year term, priced at 425 basis points over Euribor.

P&I is not an isolated case, as recent research by data provider Pitchbook shows. Deutsche Fachpflege (Advent), Group.one (Cinven) and Planet (Advent) have also replaced their private debt financings with the help of banks, via the broadly syndicated loan market. Pitchbook estimates that in Europe, loans with a total volume of around 4.2 billion euros migrated from the private debt market back into the syndicated market in the first quarter. Rating agency Moody's estimates that the first quarter global volume of loans is likely to have been in excess of 11 billion dollars.

Banks were still clearly lagging behind the private debt funds in 2022 and 2023. But the market could tilt in their favor this year. After the outbreak of the war in the Ukraine, and the turnaround in interest rates, there was great uncertainty on the liquid debt markets. Few new transactions were concluded. Borrowers turned instead to private credit funds, which were more expensive than broadly syndicated bank loans, but offered a high level of transaction security.

However, with the first interest rate cuts on the horizon, the liquid debt capital markets are starting to pick up again. According to Pitchbook, the volume of syndicated leveraged loans in Europe rose to 29.3 billion dollars in the first quarter. The volume of corporate loans grew to 22.7 billion euros - figures that were last reached in the first quarter of 2021 and 2022 respectively. The interesting thing is that the M&A market continues to provide hardly any impetus for new business. It is refinancing that drove the market in the first quarter, and accounted for almost two thirds of the transaction volume.

According to Pitchbook, many of the transactions now won back by the banks were originally intended for the broadly syndicated loan market, but had to done via private debt because of adverse market conditions. The fact that the banks are once again winning this business is primarily due to the financing costs, which are significantly lower on the syndicated loan market.

An example: April Insurance replaced a 1.2 billion euro private debt financing (Euribor plus 600 basis points risk premium) at the beginning of March with a syndicated loan priced at Euribor plus 400 basis points. The average risk premium (spread) for such loans was 421 basis points at the end of the first quarter. Moody's has estimated a price difference between private debt and broadly syndicated loans of anywhere between 200 and 300 basis points.

Until now, banks have reserved the right to increase the financing costs for syndications if the market environment deteriorates between the completion of the financing and syndication. According to the report, this so-called flex risk no longer existed in the most recent refinancing deals.

The fact that enough capital can once again be raised via the broadly syndicated debt markets, matching private debt volumes, is due to the resurgent CLO market. Collateralized loan obligations – usually invested in by large asset managers, are by far the largest group of buyers on the broadly syndicated loan market. According to Pitchbook, 26 CLOs with a volume of 10.9 billion euros were issued in Europe in the first quarter – the highest since the final quarter of 2021. The market is well on track to match the 2019 volume of 29.8 billion euros. The record is 38.6 billion euros from 2021.

The market for high-yield bonds is also picking up again. According to Pitchbook, high-yield bonds with a total volume of 22.1 billion euros were issued in Europe in the first quarter, which is already around half as much as in the entire previous year, and as much as in the whole of 2022. The market, which was shaken by the interest rate turnaround, appears to be recovering, even if the record volume of 125.4 billion euros from 2021 remains a long way off.

As in the broadly syndicated market, it is refinancing rather than new business that is driving the high-yield market. At 15.4 billion euros, almost 70% of the transaction volume was attributable to refinancing, according to Pitchbook. In absolute terms, this is the highest figure since the second quarter of 2021, when 18.7 billion euros were refinanced via high-yield bonds, although this only accounted for just under half of the total transaction volume at that time, due to the significantly higher level of new business.

According to Pitchbook, the high-yield market in the first quarter was largely dominated by single-B rated companies, which took advantage of the opportunity to replace existing debt with new and cheaper high-yield bonds. According to Pitchbook, new issues in February were priced at an average of 372 basis points over government bonds. These were the lowest risk premiums since March 2020. In March of this year, spreads even fell to an average of 356 basis points.

In some cases, private credit funds were also the ones to suffer here. The insurance distribution platform Ardonagh, for example, replaced part of its private debt financing with a high-yield bond. Both financing instruments now exist side by side. For private equity-owned companies, however, the bond market lost ground to the loan market in the first quarter, according to the report.

According to Pitchbook, private debt capital had a harder time in the first quarter than at any time since the post-Covid boom and the record year of 2021. Nevertheless, assets under management are expected to increase by around 50% over the next five years, from the current global level of 1.7 trillion dollars to 2.8 trillion dollars. However, private credit funds will have to prepare themselves for tougher competition this year, particularly in the wholesale business - now that banks have found their way back into the business.

Both markets will continue to exert their presence. The private equity landscape is divided into two camps. There are those investors who are deterred by the transparency, ratings and slower processes on the public debt capital markets. On the other side are private equity investors who accept this if it means that the financing costs are lower than via private credit.

To make matters worse for debt funds, the big banks have learned their lesson from their previous failures, and launched their own credit funds. They therefore offer access to both markets: the liquid and the private debt capital market. It is now up to the credit funds to find an answer to the banks' counterattack. The funds still have an advantage, but this is dwindling. According to Pitchbook, in the final quarter of 2023 there were ten private debt deals for every bank financing deal, but this ratio halved in the first quarter of 2024. The battle for financing private equity owned companies is entering the next round.