1. Introduction
The rapid rise of the private credit market in the last decade, and even more predominantly in the last five years, has turned heads across international financial markets, quickly creating a new mode of financing that attracts bankers, companies looking to tap into fresh capital and investors with appetite for higher yields. This success has naturally led some professionals and journalists to look at private credit as a rival or even as a threat to the more mature and well-established broadly syndicated loan (“BSL”) market, but the developments in the past couple of years have shown that while some of that competition is by design, these two markets are far more complementary than competing, with both seeing steady growth and beginning to interplay with each other in interesting and profitable ways.
2. Market Growth and Dynamics
Private credit began carving its niche in the aftermath of the global financial crisis. Tightening risk regulations for bank financial institutions forced them to limit borrowings to companies in the middle-market segment to offload pressure from their balance sheets. This created an opening for private credit lenders who were ready to deploy capital and did not have to navigate the same complex regulatory frameworks as banks to expand their growth in the lending market and provide funding to borrowers who now had a more difficult time accessing the syndicated loan market. As the market grew and private credit became one of the fastest growing forms of non-public lending, it developed additional strengths that, for certain borrowers, made it an valuable alternative to the syndicated product. For Borrowers, private credit lenders have provided a product with increased flexibility, such as creative deal structures (such as allowing PIK interest, unitranches, etc.), few or no credit ratings requirements, low execution risk and a more efficient pace in the closing of deals.
In the meantime, the BSL market retained its key advantages – a much larger pool of capital, less onerous terms for borrowers who are able to access it and more liquidity and transparency in pricing for lenders.
According to publicly available information, in 2024 it was estimated that private credit assets eclipsed $2 trillion and outstanding loans were estimated to be approximately $1.4 trillion. While undoubtedly private credit has taken some ground from the BSL market, data shows that on the aggregate both markets have seen growth in recent years and do not simply offset each other – for the 5 year period between 2018 and 2023, outstanding BSLs rose from $1.2 trillion to $1.4 trillion.
There are various signals that the private credit market and the syndicated market are converging and working together in a symbiotic way, creating a more integrated and efficient financial ecosystem. For example, major players in the syndicated market have entered the private credit field themselves by creating or expanding their own private credit operations or by acquiring or partnering with existing private credit players. Additionally, private credit lenders are occasionally approached by arrangers of a BSL to take a piece of a more challenging syndicated transaction.
3. Recent market developments
When the global economy was facing uncertainty, leveraged buyouts slowed and a rising interest rate environment caused the loan market, particularly the BSL market, to temporarily contract as a result. However, private credit lenders continued to provide certainty of execution and deal flexibility as the BSL market was less readily available. The result was what many commentators coined the ‘golden age of private credit’. Private expanded its core away from middle market borrowers and began to participate in what the market termed “mega” deals. In 2024, private credit lenders continue to provide mega deals, such as Equinox Group’s $1.8 billion facility used to refinance existing debt and pursue new initiatives. While spreads have been compressed to meet new economic realities and to compete with a resurgent BSL market, they remain healthy, and the market has a positive outlook on the sector.
After a slow 2022-2023, BSLs mounted a comeback in 2024, with some highlights being Advent’s take-private of Nuvei for $6.3 billion, Thoma Bravo’s $5.3 billion acquisition of Darktrace and fervent repricing and dividend recap activity. Refinacing activity has been a windfall to the BSL market; according to Credit Sights, over 61% of loan were either being repaid, repriced or extended in 2024. This activity was driven by the BSL market’s buy-side demand outpacing supply in the market, which allows performing credits priced above par to tap the market for lower rates and borrower favorable terms. The BSL market also saw an uptick in M&A activity and even welcomed lower rated credits back to the market as exemplified by Clear Channel International’s $375m facility, a Caa1/CCC+ rated borrower.
Overall, both markets are looking to position themselves to better serve borrowers’ needs of the moment and play to their strengths, which has led to the evolution of certain terms in the market as discussed in the following sections.
4. PIK interest on the rise
One feature that has made private credit lenders more attractive to certain borrowers is their willingness, for certain credits, to accommodate requests for “payment in kind” interest (“PIK”) – allowing all or part of an interest payment to be capitalized and added to the principal of the loan to be paid at maturity. This is most commonly structured as a “toggle”, meaning that the borrower can decide whether and when to use PIK. Typically, there is some portion of the interest that still has to be paid in cash (although there are cases where no cash requirement is present), and using PIK may come at an additional premium (usually a 25bps – 50bps premium) for the company on top of the interest rate, as risk for lenders increases (although, on the flip side, so does yield/return). For example, the PIK-toggle feature in PDI Technologies increased the interest rate if the option to PIK was utilized (e.g. S+550 cash-pay pricing, increased to S+575 with the option to PIK 1.25%), and we have seen similar proportionate structures in other deals, where an option to PIK 1.25% adds to 25bps to the applicable margin, whereas an option to PIK 1.50% pays lenders an extra 50bps. Another common feature of PIK is that it typically includes a ‘sunset’ that is two years or less (e.g. the borrower can only elect to use PIK for an agreed period of time under the credit agreement, and then the borrower must go back to making cash interest payments).
The appeal of PIK interest is clear in a high interest environment where companies may be finding it hard to service debt or if they face declining revenues and would prefer to keep more cash on the balance sheet. The mechanism is not new and has been seen in high yield issuances for some time but has been a popular topic since the Fed’s rate hikes took a toll on borrowers and private-credit lenders have been offering those types of deals more frequently to borrowers. According to Lincoln International, in 2024 more than 9% of new private credit deals had PIK options. One such example is the Equinox transaction referenced above, where the borrower had debt to refinance in the wake of the COVID-19 pandemic and in searching for options, it obtained a first lien/second structure with both tranches including PIK provisions (4.13% PIK on the first lien and up to 16% PIK on the second lien). Not only does PIK provide relief for borrowers when they have temporary trouble servicing their debt, but it also provides borrowers with additional flexibility out of the gate. For example, if a borrower needs time to build out and scale their business, electing to PIK interest payments in early in the life of credit agreement can give the borrower the necessary liquidity to grow and increase their revenue and cash flows so they get to a point where they can comfortably service their debt.
In contrast to private credit loans, BSLs rarely offer a PIK option. This is one area they are unlikely to be able to match private credit lenders because most leveraged loans are sold to institutional investors which prefer predictable cash interest income. Additionally, when borrowers have the ability to toggle PIK during the life of a loan, parties trading the loan on the secondary market may not know how to price a loan as the parties may not know what percent of accrued interest will in fact be paid (vs. PIK’d). This can have economic consequences for the parties trading the debt and lead to differing views over how to value the loan.
Some believe that PIK interest is suppressing the private credit default rates in recent quarters. So while private credit lenders may accommodate borrowers by allowing PIK, there has been a shift towards limiting the risks associated with it. Due to the inherent riskiness, some institutions have rules to limit total commitments if a PIK option is available for borrowers and some LPs are pushing back on permitting PIK at all.
5. Delayed draw term loans make their way into BSL markets
Much like PIK, delayed draw term loans (“DDTLs”) are commonly associated with the private credit market and remain uncommon in BSL deals. DDTL facilities provide a term loan commitment at pre-agreed terms which could be drawn upon for a period of time after closing and are typically subject to certain conditions. Their availability provides flexibility, certainty and fast execution, which makes them attractive to sponsors with portfolio companies that have growth through acquisition/buy and build M&A strategies. The DDTL facility provides the portfolio company with committed financing for bolt-on acquisitions without the need to tap the market for the succeeding months after closing. The typical commitment period for DDTLs is 12-24 months and will often include a limit on the number of drawings under in the credit documentation. In their earliest days, DDTLs were available in the syndicated market only for specific transactions that were already identified at closing; however, today borrowers are seeking DDTLs for flexibility to enter transactions that have not yet materialized.
In the syndicated world, DDTLs remain challenging to execute, as they take balance sheet capacity from investors without guaranteeing the same returns as regular funded term loan facilities. Nevertheless, as private equity sponsors with these strategies prefer the certainty of DDTL facilities, the BSL market’s desire to provide the DDTL product has caused an uptick of such requests.
Arrangers syndicating DDTLs have to confront practical realities and commercial points around the syndication of the DDTLs. They limit the investor base in syndications because not all investors have the ability (or willingness) to purchase and hold unfunded commitments. Further, certain investors, such as CLOs, may be limited by applicable tax guidelines from acquiring the DDTL unless the CLO is also acquiring the associated term loan or certain other requirements are met. While many consider DDTLs simply an increase to the existing term loan, certain conditions must be met to achieve fungibility (e.g. OID/tax treatment of the loan and associated fees). Furthermore, multiple draws on DDTLs may prove challenging on the operational end for agents to ensure fungibility with loans actively trading. Relatedly, Agents need to determine how any original issue discount (“OID”) applicable to DDTL draws is treated vis-à-vis loans that are traded. As an example, OID is commonly structured such that a portion of the OID is due at closing and a portion is owed at funding of the DDTL, with the loans funded net of the remaining amount of discount. If a DDTL commitment is traded in the secondary market, the agency and operations teams, in conjunction with deal teams, may have to decide if the OID applicable thereto will ‘travel’ with the commitment to the assignor taking on the commitment. This raises questions of how to price the commitments on the secondary market. Similarly, should secondary market participants be required to purchase a corresponding portion of the funded term loan if they would like exposure to the DDTL commitments (see discussion on ‘stapling’ below)? As this issue, among others, is relatively new to the syndicated market. agents and arrangers are taking different positions on how to handle OID based on discussions with investors, as well as practical considerations associated with administering such facilities.
There is also the marketing question of whether the DDTL commitments should be sold separately (which complicates the structure) or be “stapled” with the initial term loans to be drawn at closing, which is the approach generally preferred by arrangers and most commonly seen in the BSL market. Stapling is typically done such that the DDTL facility is syndicated on a pro rata basis with the initial term loan, creating a single unit to purchase and trade (e.g. the parties are prohibited from selling their initial term loans or DDTL commitments or loans without a proportionate portion of the other facility). The credit agreement and arrangers also have to solve for who is actually on the hook for funding the DDTL drawdowns and whether these should be fronted by arrangers or the agent, or paid directly by investors.
Finally, we turn to the economics. In the US, fees can take the form of commitment fees (sometimes structured as a ticking fee) and closing/funding/upfront fees/OID. Pricing varies in terms of amounts, step-up periods and timing of payments (at closing, at draws only, quarterly, at termination). A key point is timing – i.e., whether lenders get paid on undrawn amounts of the DDTL commitment or just on the amount that is actually funded to the borrower. In in the private credit space the OID on the DDTL is most often payable 50% on closing and remaining 50% on drawdown (or sometimes cancellation or end of the DDTL commitment periods if the DDTL remains unused) and some syndicated deals try to follow this model but there is currently variation depending on the challenges structuring the DDTL in the BSL market. Agents and Arrangers will need to keep the points flagged above in mind when deciding how to best negotiate with borrowers on which fee structure is best for a credit, all while keeping in mind what will make it easiest to administer a fungible TLB facility.
Additionally, there are various terms and conditions which need to be documented. DDTLs are typically required to be used for acquisitions or investments, but general corporate purposes and replenishment of cash on balance sheet have also been seen as permitted uses in bullish markets. As noted above, the goal is usually to have DDTLs fungible with closing date term loans for tax and trading purposes and this may require an increase of amortization and consideration of maturity and draw dates (especially where there is more than one draw under the DDTL facility) and DDTL availability, and what fees will be included as OID. Conditionality to drawings is similar in BSL and direct deals. It typically requires a leverage governor, tested at incurrence or at drawdown and no event of default. While DDTLs are slowly becoming more popular in the BSL market, it is important to note some operational differences between DDTLs in the BSL market and the private credit market. In the private credit market is not uncommon to see a DDTL availability period for 24 months, where in the BSL the availability period is commonly subject to flex and therefore investors may demand the period be shortened to 12-18 months. Another difference between the two markets is the amount of notice that needs to be given to draw on a DDTL. In the BSL market, the notice that needs to be given is usually consistent with all other borrowings under the credit agreement, whereas in the private credit market lenders may need to issue capital calls to their LPs to gather the funds for the loans, and therefore may require additional notice for an DDTL drawings.
6. The Allure of Portability
Another concept that is making its way back into the headlines in both syndicated and private credit loan markets is portability clauses. Portability is the ability of the borrower to change ownership or control (or, looking at it from sponsors’ perspective, their ability to sell the company or a majority equity position) without triggering an event of default or a mandatory prepayment, subject to certain conditions. Portability has been an attractive feature in 2024, in particular in connection with the market craving refinancings and dividend recaps, and may also serve as a useful tool to take pressure off sponsor potential sale of assets while waiting for markets to stabilize and interest rates to begin subsiding as credit agreements can potentially travel with an asset without the buyer needing to seek new financing as a result of the transaction.
Both the BSL and private credit markets however have remained reluctant to fully embrace portability. Portability provisions were initially offered in recent BSL deals for Rocket Software and Crisis Prevention Center but ultimately rejected by investors during the syndication process as the market is trying to take stock of latest developments. Private credit lenders also remain cautious with respect to portability provisions as they view private credit loans as more of relationship based product and want to know who they are, and will be, financing during the duration of their loans.
7. Covenants and borrower flexibility – how the private credit and BSL markets compare
As the private credit and BSL markets have grown side by side, it should not come as a surprise that the terms of the credit agreements in each market have come closer together. Even with a convergence of terms recently, there still remain some common differences between typical terms in each market. For example, in the BSL market, loans are still mostly cov-lite (>96%), whereas it is not uncommon find financial covenants in the private credit market (according to recent date, ~55% of top-tier sponsor deals are cov-lite), depending on the credit. Additionally, with respect to incremental debt, it is relatively common for private credit lenders to have a right of first offer (“ROFO”) to provide such debt, whereas it is rare to find such a ROFO in favor of the existing lenders the BSL market. While the baskets included in credit agreements across both markets will mostly be the same, the size and restrictions around such baskets will typically change depending on the market. For example, private credit deals will often include requirements that there be no Event of Default for a borrower to use the general restricted payment basket or ratio based restricted payment and investment baskets, but in the BSL market such Event of Default conditions might not always be present. Private credit lenders will also typically require some amount of deleveraging before a borrower can access ratio based baskets, but in the BSL market typically set ratio based baskets at the closing date leverage ratios.
Other covenant differences between the BSL and private credit markets remain at play, depending on the strength of the credit and the relationship with the sponsors and borrowers.
8. Dividend Recaps
Dividend recapitalizations are reaching peak levels in 2024, standing at $35.3 billion which is comparable to the highest totals previously seen, and has involved both private credit and BSL deals. Investor interest has compressed spreads and sponsors are utilizing that to extract dividends from well performing companies in their portfolios while waiting for more attractive markets for IPOs or equity sales.
Standout deals were mostly in the BSL market with Equinity, United Pacific and Zelis as standouts. Popularity of dividend recaps is exemplified in the relatively high average leverage in such deals reaching 5.1x. Private credit is also on the playing field, mostly engaging in smaller deals, but typically able to compete with syndicates where borrower EBITDA is in excess of $50m. In 2024, Park Place Technologies, a data center services company, secured $2 billion from direct lenders to refinance existing debt and to pay a dividend to its private equity investors, with the new term loan for Park Place priced at S+525, substituting the previous first lien facility at S+500 and second lien facility at S+900.
9. The future
It is expected that private credit will continue to be a compliment to the BSL market. An IMF report from 2024 analyzed the segment and concluded that “financial stability risks posed by private credit appear contained”. Growth of the private credit sector has generally matched profits and does not show any “bubble”-like symptoms. Interest rates are normalizing just in time for the impending BSL maturity wall in 2026 which stood at $174.5 billion in August of 2024, and it will be interesting to observe if more borrowers opt to go to private credit lenders or whether BSL market participants will be able to offer flexible enough terms to retain them. The outlook for the loan market in 2025 appears robust, with both the broadly syndicated loan (BSL) and private credit markets poised to continue their growth trajectories. We expect to see increased activity as a result of favorable interest rates and robust investor demand. The symbiotic relationship between these two markets is expected to deepen as they adapt to evolving economic conditions and borrower needs. The BSL market, with its larger pool of capital and liquidity, will likely continue to attract high-profile transactions and offer competitive terms for borrowers. Meanwhile, the private credit market, known for its flexibility and innovative deal structures, will remain a vital source of capital, especially for those seeking bespoke financing solutions. We expect this interplay to foster a resilient and adaptable leveraged loan market, capable of supporting a wide range of financing requirements. As both markets evolve, their collaboration will likely continue to lead to innovative financial products and structures, enhancing overall market efficiency and stability. Examples of collaboration between the markets can come in many forms. Banks and private credit lenders are increasingly forming partnerships to offer innovative financing solutions which exemplifies how they are working together to benefit borrowers by providing a broader array of funding options. The continued expansion of private credit presents traditional BSL market participants with a new revenue stream through these strategic alliances. Capital markets professionals at banks are now better equipped to present both traditional and private credit financing options to borrowers from the outset. Leveraging their established infrastructure, which includes sales teams, traders and extensive relationships, banks are positioning themselves as comprehensive problem solvers. This integrated approach allows them to offer tailored solutions, even if it means facilitating a private credit loan, thereby still enhancing banks’ role as a one-stop shop for financial needs. Established private credit lenders have been participating as ‘anchor’ investors in the BSL market, working directly with borrowers and BSL arrangers to help minimize syndication risk. Traditional private credit lenders have also built out their trading desks to partner with traditional BSL arrangers to help fill out syndicates on BSL facilities. Whether it’s through direct partnerships or pushing each other to offer new financing solutions for borrowers both markets can continue to grow and offer complimentary products. The continual growth of both markets will give borrowers flexibility to pursue whatever financing solution suits their needs at the time. If economic uncertainties diminish in 2025, both markets are poised to leverage their unique strengths to capture new opportunities, thereby reinforcing their interdependent growth and resilience.