Private Credit to See Deal Frenzy to Start 2020, Proskauer Says

(Bloomberg) -- U.S. private credit activity is likely to see a strong start to the year as transaction sizes balloon and borrowers look to take advantage of low rates ahead of the presidential election, according to the law firm Proskauer.

Companies hitting revenue and earnings targets along with debt-funded acquisitions by private equity firms will also help boost activity in the $800 billion asset class.

“What clients are hearing is that they expect a busy first half of the year, and deeper into the election cycle there will be a big chill across the market,” Stephen Boyko, co-head of Proskauer’s private credit and finance groups, said in a phone interview.

The law firm’s clients are increasingly making bigger loans, with 32% of the deals the private credit team worked on in 2019 equal or larger than $200 million, up from 27% in 2018, according to Proskauer data. The firm worked on $57.9 billion of private credit deals in 2019, up 38% year-over-year.

Conditions overall remained borrower friendly, with 59% of Proskauer’s private credit deals last year defined as “covenant loose” -- meaning that cushions to trigger those protections are considered large.

Interest rate margins decreased in 2019, with the average rate for unitranche deals, which blend first-priority and subordinated loans into a single facility, at 5.5%, down from 5.8% in 2018 and 2017. Meanwhile, leverage for U.S. deals also rose to 5.4 times, up from 5.2 times in 2018.

Competition among lenders remains cutthroat, particularly as there is a dearth of quality deals available.

“When a quality deal hits the market, our clients are all over it,” he said. “There’s no question they’re willing to compete on terms, on pricing, and on leverage for a high quality asset.”

Having strong relationships with sponsors -- by working together often or being an investor in the private equity funds themselves -- can help a lender boost access to sourcing. The ability to write large checks is also a must to compete in today’s landscape, Boyko said, as well as the capacity to tack on debt for future mergers and acquisitions. In 2019, 64% of the firm’s deals backed acquisitions, up from 61% in 2018, according to Proskauer data.

“Something that is important to sponsors is the access to follow on capital,” Boyko said. “If you’re going to write a check for $100 million or more -- are you capped out on your concentration limit in your fund or do you have a lot more capacity to fund future growth? Sponsors want to know where are you not only in year one, but in year two, five or seven.”

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Adam Cataldo

©2020 Bloomberg L.P.