In the leveraged buy-out market, a fierce competition is emerging between banks and providers of alternative financing methods, further fueling concerns about financial stability. The rating agency Moody's warns of a "race to the bottom," as analysts anticipate looser terms and declining credit quality due to the competition for mandates.

This competition is intensified by the previous years' boom in private credit funds. These vehicles have experienced dynamic growth, particularly in times of low interest rates, with their assets under management now exceeding $1.5 trillion, surpassing the size of the leveraged loans market. In contrast, traditional investment banks have lost significant market share in recent years and are now seeking to regain it.

On the other hand, market participants are increasingly interested in high-yield assets. Many investors are banking on an impending end to the interest rate hike cycle, and concerns about a recession in the United States are diminishing. Meanwhile, the new supply in the high-yield segment remains limited, despite a recovery in primary market activity compared to 2022.

Moody's anticipates that the low issuance levels in recent months will pave the way for a significant increase in leveraged buy-outs. Particularly, lower-quality loans are expected to find acceptance in the private debt market, as providers in this space have relatively high capital commitments ("dry powder").

Greg Hertrich, Head of US Bank Strategy at Nomura in New York, emphasizes in an interview with Börsen-Zeitung that in the future, a larger portion of loans issued for buy-out financing is likely to move away from traditional channels. He states, "The introduction of Basel III in the USA, with its stricter capital requirements for banks, is expected to contribute to the continuation of this trend."

During the "next phase in the evolution of this market," Hertrich expects banks to seek opportunities to capitalize on the private credit boom through strategic partnerships with alternative asset managers. For example, Wells Fargo recently announced a joint $5 billion vehicle with the asset manager Centerbridge. Consequently, stronger regulatory efforts for the private credit industry are likely to be on the horizon following the next US presidential election.