Growing Opportunities in Private Debt
In the first quarter of 2016, as global equity and fixed markets were buffeted with volatility, investment banks, still reeling from the impact of a number of unsuccessful junior loan and high yield syndications in the fourth quarter of 2015, began to pull back from underwriting of junior credit. As a result, providers of private debt capital were able to step into the void left by many traditional market participants, driving improved pricing and tighter documentation.
Private equity funds, which account for over 70% of aggregate leveraged loan issuance and more than 90% of second lien issuance, 1 are increasingly bifurcating the debt capital formation process: While banks are still the preferred source of broadly syndicated first lien loans (typically, anything over $250 million), alternative debt capital providers are the new “go-to” sources of junior capital. Moreover, private debt players are taking an increasingly important role in larger unsecured financings, as issuers may want to sidestep the vagaries of the high yield market.
As a testament to the instability of the capital markets in the first quarter, leveraged loan new issuance barely topped $35 billion, compared to $126 billion in the second quarter. As a result, despite near-record second quarter issuance, year-to-date volume is approximately 20% lower than last year. In particular, second lien volume is down over 66% versus the comparable period in 2015. Still, “privately placed” second lien volume is 2.5 times that of the same period last year, underscoring the shift to providers of private capital. 2
1,2 Source: S&P LCD.
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