Covid debt rush ignites direct lending market

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Bombardier had always relied on its banks to raise significant funds, but when the Canadian aircraft manufacturer needed a $ 1 billion loan at the height of the coronavirus crisis, it turned elsewhere: to a private investment company.

For years, mid-sized companies have been indebted to what are called direct lenders, who often sit in large private equity groups. But a wave of influx of deep-pocketed investors like Middle Eastern sovereign wealth funds is now giving some investment firms the firepower they need to lend to large corporations. The coronavirus crisis, which has shaken corporate balance sheets, has accelerated change, according to executives.

Paulo Eapen, head of European activities at GSO Capital Partners of Blackstone, said he was busier than ever. “We tend to be more active in times of dislocation and I think we’ll be in a dislocation period for a while.”

GSO is one of a handful of companies capable of issuing a $ 1 billion check on their own, a group that includes private equity firms, such as Apollo and Ares – and Bombardier lender HPS Investments, a specialized debt investor with $ 60 billion in assets.

In a sign of increased competition for large deals, Apollo in July unveiled a new direct lending partnership with Abu Dhabi sovereign wealth fund Mubadala, which will specifically target $ 1 billion deals, with the aim of deploy $ 12 billion in just three years.

Mubadala also entered into a similar but smaller partnership in September with asset manager Barings, targeting European companies. Credit Suisse’s investment arm, meanwhile, partnered with the Qatar Investment Authority to launch what it called “a multi-billion dollar direct private lending platform.”

Large-scale loans are nothing new. Last year, Apollo supported the to resume of the American newspaper company Gannett with a loan of 1.8 billion dollars, at a staggering interest rate of 11.5%.

But James Zelter, co-chairman of Apollo and director of credit investments, said such large-scale lending opportunities had “only accelerated” since the start of the pandemic.

“There is a tough credit environment ahead and our view is that these companies will need different capital solutions,” he told the Financial Times.

Many companies at the forefront of the direct lending boom can trace their lineage back to michael milk, the creator of the modern day junk bond market. Apollo co-founder Leon Black was a senior executive at Mr. Milken’s Drexel Burnham Lambert in the 1980s, as was his brother-in-law Tony Ressler, who also co-founded Ares in 1997.

However, since the buccaneering era of the 1980s junk bond boom and collapse, the now relatively stable high yield bond market has exceeded $ 1 billion in the United States, as has its close cousin of leveraged loans. In both cases, investment banks underwrite corporate debt on highly standardized terms, before distributing it to hundreds of asset management companies.

Direct lenders, on the other hand, act alone or in a small club. They can offer loans with unconventional features, such as deferred withdrawals, in a process that is conducted entirely out of sight of the public markets. This increased confidentiality and flexibility comes at a cost, meaning that large transactions tend to come from privately funded companies with a specific reason to avoid public procurement.

Ares broke records for the largest private loan deal ever in June, arranging a £ 1.9 billion loan for Ardonagh, a private UK insurance broker who had previously received a mixed reception in the high yield bond market.

Bombardier, founded 78 years ago, has been listed for decades and has billions of dollars in listed bonds outstanding. Yet as he sought to close a possible funding gap this summer, pending regulatory approval for to sell Its € 7.5 billion rail division, the manufacturing giant turned to HPS instead.

“We had to look at every piece of their existing capital structure, all the different business divisions and deal with all of that complexity to come up with a deal that everyone was happy with,” said Mike Patterson, Managing Director of HPS.

Bombardier said it had “thoroughly examined several different financing options” and ultimately decided on a private deal “because it offers more flexibility at a competitive cost”. HPS signed the full $ 1 billion pledge in July, before later calling on Apollo and Ares.

Other big checks could have been made, executives say, had it not been for the market-calming measures adopted by the US Federal Reserve to buy corporate bonds and cut interest rates. This allowed distressed borrowers such as the cruise line Carnival raise funds in the bond market instead.

“I think everyone was a bit surprised at how quickly the rally took away some of these bigger capital opportunities,” said Kipp deVeer, head of credit at Ares Management.

But mid-sized companies, which deVeer said have “less flexibility in public and liquid credit markets,” still offer significant opportunities, he added.


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