In 2024, Catalent tapped direct lenders for a $4.2 billion term loan to fund its acquisition by Novo Holdings. Last month, the drug manufacturer refinanced with a $4.1 billion syndicated loan that it says will cut its annual interest expense by about $100 million.
Catalent’s move captures a shift under way in the leveraged finance market, according to a new report from DC Advisory. Redemptions from retail investors are contributing to the erosion of private credit’s pricing advantage, creating an opening for banks to win refinancing business.
The problems in the retail private credit market show few signs of abating.
All the largest direct lenders, such as Ares, Apollo and KKR, also run business development companies, the most common form of credit fund aimed at individual investors, all under varying degrees of pressure to redeem investors.
PitchBook LCD reported on Wednesday that investors in Cliffwater’s direct lending interval fund sought to redeem 16% of shares outstanding in the third quarter, down from 17% in the prior quarter.
Earlier this month, Blackstone’s BCRED reported Q3 redemption requests of 10%, consistent with the prior quarter.
Outflows from these vehicles are forcing direct lenders with significant retail exposure to rethink their portfolio construction and position sizes, leading to reduced lending and making the syndicated loan market relatively more attractive, DC Advisory noted.
In July, aerospace supply chain business FDH Aero secured a $1.1 billion term loan to back its acquisition by Bain Capital, after the deal had previously been financed by direct lenders.
By contrast, few syndicated loans have been refinanced in the private credit market in recent months, with none at all coming in March, May or July, the investment bank and M&A advisor noted.
This dynamic is also reflected in the cost of newly issued loans. New-issue private credit loan spreads averaged 502 basis points over the three months ended Aug. 31, up from 475 basis points in Q1. The 500-549 bps range now accounts for 52% of all sponsor-backed direct lending deals, against 25% in Q1.
The spread between syndicated loans and private credit loans issued in the US hit 162 basis points in the three months to Aug. 31, about 39 basis points wider than in the first quarter, according to LCD.
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This article originally appeared on PitchBook News
