Private Credit Deals Dry Up in Rout With Pipeline Out of Reach

(Bloomberg) -- The U.S. direct lending market is largely shuttered, as private debt firms take aim at answering investor queries and seeing how much of their credit portfolios may be impacted by the coronavirus pandemic.

Financing transactions that were far along in the process before the global rout -- and specifically tied to acquisitions or buyouts that need to get done -- are likely to still get completed, but new deals are on ice for now, according to an informal survey of five U.S.-based direct lenders.

“The level of shock of what’s happened really in the past week is so severe that people are trying to pick themselves up off the ground and figure out what the next step is,” said William Brady, head of the alternative lender and private debt group at law firm Paul Hastings.

Activity in direct lending, one of the largest strategies in the $812 billion private credit market, has nearly ground to a halt as market-wide turbulence has kept most borrowers at bay. U.S. investment-grade companies have rushed to tap the market in whatever small windows present themselves, like Tuesday, while the high-yield market hasn’t priced a deal since March 4.

“Volume is down materially because even three weeks ago, M&A volume was already slow,” said Susan Kasser, co-head of Neuberger Berman’s private credit business. “So if something was in talks already, some of those conversations are still being had.”

With the primary market showing few signs of life, lenders are assessing the effect on existing borrowers, according to Brady. They’re dealing with a “huge spike” in revolving loan funding requests as borrowers try to maximize liquidity, he said.

Read more: Leveraged Loans, Private Debt Most Vulnerable to Virus Risk: UBS

Market participants are optimistic that activity will pick up again, but the time line is unclear, leaving $300 billion of dry powder in limbo. Private debt is subject to private equity activity, so less buyout activity will also slow opportunities in private debt, Kasser said.

“Whenever there is a sharp adjustment, it takes a while for buyers and sellers to come back into sync,” Kasser said. “Volume will come back, but whether it takes a month, three months, six months or nine months, no one knows.”

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