Private Lenders Storm Public Bond Markets

A group of private credit funds backed by firms like Blackstone Inc. and Ares Management Corp. have found a cheap place to raise money, at a time when they already have record levels of cash: the investment-grade corporate bond market.

Private credit funds, known as business development companies (BDCs), have raised more than $13.4 billion in the U.S. investment-grade bond market so far this year, according to data compiled by Deutsche Bank AG. That’s already nearly double the $8 billion raised over the entire course of 2023 and the highest since 2021, when $21.4 billion was sold.

The bond-selling spree has driven money into a market that already has plenty of liquidity. Private credit funds have a record amount of dry powder to invest—around $500 billion. And the opportunities for putting that money to work are increasingly limited, partly because the leveraged buyouts (LBOs) that are often financed by private credit have been drying up.

But in the investment-grade corporate bond market, investors are largely shrugging off these risks, underscoring how intense demand is for notes carrying relatively high credit ratings. BDCs are now finding cheaper financing in the unsecured corporate bond market than in the secured market, in some cases. Last month, Blackstone’s Secured Lending Fund borrowed $400 million of unsecured high-grade notes at 145 basis points (bps) over the benchmark. By contrast, most of its outstanding senior secured funding facilities have higher rates than this, a Bloomberg News analysis of regulatory filings shows.

“When you can get cheaper financing, you can also invest at cheaper rates,” said Logan Nicholson, a managing director at Blue Owl Capital Inc. “With base rates where they are, returns are still attractive. This helps us remain competitive for the deals that are out there, as spreads come in.”

Private loans have recently paid spreads of between 475 bps and 550 bps over U.S. benchmarks, at or near historical lows, data compiled by Bloomberg shows. Borrowing more cheaply for their own funds is one lever that private credit firms can pull to partially mitigate any negative impact on returns.

In May, Ares Strategic Income Fund—which launched in April—raised $700 million of five-year notes, while a Morgan Stanley fund borrowed $350 million and Blue Owl Credit Income raised $500 million of notes with the same maturity. Earlier this week, HPS Corporate Lending Fund—known as HLEND—became the latest BDC to take advantage of attractive borrowing costs, selling $400 million of five-year bonds.

Conducive capital markets, fewer economic worries, and the record amount of dry powder have all helped fuel double-digit growth in private credit markets, according to Bloomberg Intelligence analysts David Havens and Nick Beckwith. BDCs in particular have prepared by issuing bonds, building out credit curves and boosting liquidity, they noted.

Refinancing needs are also growing for BDCs that first tapped the market a few years ago, according to Doug Conn, an investment-grade strategist at SMBC Nikko Securities America Inc. Though borrowing costs have gone up since as a result of the Federal Reserve’s aggressive rate hikes, he predicts that BDCs will continue to issue.

Right now, BDC bond issuance is running 68 percent ahead of 2021’s pace, estimates Josh Warren, co-head of FIG debt capital markets North America at Deutsche Bank. “The sector is well-positioned to set a new volume record,” he said.

More Flexibility

BDCs were first created in 1980 by Congress to fuel job growth and boost lending to small and midsize American businesses. They typically raise equity from investors in order to issue loans to the middle-market firms that banks may deem too risky to lend to. Over the past few years, they’ve also started selling corporate bonds.

A key feature of the vehicles is that they dole out most of their earnings to investors as dividends so they don’t have to pay corporate income tax. To produce the desired investor returns and stay appropriately levered, the funds need to meet inflows of equity capital with debt, according to Warren.

As the private credit market grows, issuers are becoming more familiar to investors, confidence around secondary market liquidity is rising, and it’s also becoming easier to make relative value comparisons within the sector, said Brendan Murphy, head of U.S. investment grade syndicate at Deutsche Bank. More money has poured into private credit funds from wealthy investors, retirement plans, sovereign wealth funds, and even banks.

“Banks are falling over themselves to provide leverage to private credit funds,” said Andrew Bellis, head of private debt at Switzerland-based Partners Group. “It’s a good time to get more flexibility and lower pricing, which helps us to remain more competitive too.”

Even with private credit fundraising slowing in the first quarter, limited partners remain committed to the asset class with plans to continue allocating. “It certainly takes a more nuanced credit approach,” said Matt Brill, head of North America investment-grade credit at Invesco Ltd., referring to BDCs. “A lot of investors got very nervous about them in 2020 and 2021 with Covid, and then last year post-SVB and Credit Suisse failure.”

The debt generally trades like BB rated bonds, added Brill. While they’ve performed well in the past year, they still trade wide for their rating, according to Bill Zox, a portfolio manager at Brandywine Global Investment Management.  “In a hard-landing scenario, they will trade more like CCCs than BBBs and that is not zero probability,” he said.

Recent deals include:

• Stifel Financial Corp. and Lord Abbett & Co. are teaming up on a joint venture for private credit.
• Gopher Resource, a provider of recycling services, has reached out to private credit lenders for financing as it struggles with liquidity.
• KKR & Co. obtained a private credit loan of about A$500 million from Blackstone Inc. and Goldman Sachs Asset Management to help finance its acquisition of Australia’s Perpetual Ltd.’s corporate trust unit.
• Oak Hill Advisors led and was agent to a more than $1 billion facility to refinance National Carwash Solutions’ existing debt.
• Fortress Investment Group is providing £750 million to Tabeo Ltd., which specializes in consumer healthcare financing, to approve and manage loans for dental work.
• Thoma Bravo has reached out to private credit lenders as it seeks to raise around $3.5 billion in fresh financing for its automated professional services provider ConnectWise.
• Inetum, a French IT services company owned by private equity firm Bain, has launched a sale of its software division.
• A group of private credit lenders provided debt financing for Bain Capital’s $5.6 billion acquisition of PowerSchool Holdings Inc., beating out banks that had also competed to finance the deal.
• Blackstone Inc. is in talks with private credit lenders to raise as much as $2.8 billion in financing for its audio-visual and event-services company Encore Group USA LLC to address its upcoming maturities.
• Hayfin Capital Management, the private-credit specialist that began exploring a sale last year, has put those plans on ice in favor of a management buyout.
• Team Global Express, an Australia transport and logistics company, has lined up a A$190 million loan from CBA and a number of funds to electrify its truck fleet.
• Oxley Holdings Ltd, a cash-strapped property developer in Singapore, is seeking a private credit loan of $100 million to $120 million partly to help repay a Singapore dollar bond due next month.

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