Leverage levels in private credit will increase as alternative asset managers’ rapid capital deployment in turn increases their share of the private credit market, according to a private credit research report by Moody’s Investor Services.
The report, titled ‘Escalating private credit competition will increase risk and scrutiny’, predicts that leverage “will increase in a number of ways that may not be immediately visible or obvious, be-cause many of these instruments are already commonly used for a range of financing needs”. The trend towards asset-based finance, Moody’s says, will see alternative asset managers building out their own origination capabilities, increasing their market share. However, these instruments — historically within the domain of banks, with a focus on maximising yield — will push leverage levels in financial markets higher.
The report also predicts further growth in private lending to corporates in Europe and reveals that companies are “eager to pocket big interest cost savings” of 200-300 basis points. So far this year, 21 companies have issued a broadly syndicated loan (BSL) in refinancing $8.3bn of debt previously provided by direct lenders, with Moody’s citing PitchBook LCD data. These transactions allowed the BSL market to recover over $16bn of loans that were repaid in favour of private credit in 2023.
Moody’s expects leveraged buyout activity to “gain more traction” after a slow start to 2024, as private credit lenders “put a pile of dry powder to work in the markets”, citing JPMorgan’s $5bn financing package for KKR & Co to acquire its majority stake in healthcare data and technology provider Cotiviti from Veritas Capital last month.
