Competition comes to Private Credit

From The Economist:

The history of leveraged finance—the business of lending to risky, indebted companies—is best told in three acts. High-yield (or “junk”) bonds were the subject of the first. That ended in 1990 when Michael Milken, the godfather of this sort of debt, was sent to prison for fraud. In the second act, the extraordinary growth of private equity was financed by both junk bonds and leveraged loans, which require companies to pay a floating rate of interest rather than the fixed coupons on most bonds. Private-credit investors are now supplying the third wave of money. Since 2020 such firms, which often also run private-equity funds, have raised more than $1trn. ...

America’s $4trn leveraged-finance market now comprises junk bonds, leveraged loans and assets managed by private-credit firms, in roughly equal proportions. Yet owing to fierce competition to refinance debt and fund scarce new deals, private credit’s prospects may no longer dazzle. ...

As high interest rates put balance-sheets under pressure, for example, borrowers of private loans are increasingly negotiating to defer their interest payments. But healthier firms can afford to shop around. ... borrowers securing coupons that are 1.6 percentage points lower on average. Private lenders have had to slash the cost of their loans to compete. ...

the most likely outcome is that the line separating public and private loans will become increasingly blurred. That would mean a busy future for private credit—but one that is more commoditised and less profitable.