Private Credit Market to See M&A as Virus Forces Consolidation

(Bloomberg) -- The $800 billion private credit market may see more M&A among lenders as some are forced to contend with problems in their own debt portfolios.

Over the next year or two the market is likely to see more consolidation among private credit providers, as less well-positioned firms struggle with portfolios or lack of scale, Randy Schwimmer, head of origination and capital markets at Churchill Asset Management, said in an interview.

“For lenders that have been living on the riskier edge of the credit spectrum, the next quarter or two will prove whether that strategy has made sense,” Schwimmer said.

The mid-sized businesses that non-banks typically lend to have been pummeled in the wake of the coronavirus pandemic. The lenders that are forced to provide additional cash to those borrowers to keep them afloat may find themselves sidelined by bigger firms.

“Scale and relationships will only grow in importance to be a leading direct lender in this environment,” Schwimmer said.

Private credit firms that are able to deploy cash are likely to score the best lender-friendly terms in years.

“For investors this could resemble the 2010-2012 period,” Schwimmer said. “Structures will be tighter, leverage lower and spreads wider, and that will only be enhanced by the volatility in liquid markets.”

Churchill, which has $24 billion in committed capital, is seeing the pipeline for direct lending deals build up again. The deals it’s doing remain “defensive in nature,” and are primarily in sectors such as business-to-business, information technology and software, as well as some pockets of health care. The firm is avoiding energy, real-estate, non-private equity backed, and covenant-lite deals, according to Schwimmer.

It’s unclear if large unitranches, which hit a record pace last year, will return to the market, and how the M&A pipeline shapes up.

“Will leading players have an appetite to underwrite and hold big commitments in the near-term?” Schwimmer said. “That’s the real test for the health of portfolios and future credit outlook.”

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