February 26, 2025 - Capital markets were wide open for business in 2024, leading to a surge in volume across the U.S. direct lending and broadly syndicated loan (BSL) markets. This backdrop created a more balanced dynamic between the markets, expanding borrowers’ financing options.
Year over year, direct lending activity more than doubled. According to KBRA Direct Lending Deals (DLD), volume spiked to $302 billion (up 107% YoY), while LSEG LPC’s Private Deals Analysis reported that direct lending to middle market companies increased 85% to $139 billion, with overall direct lending doubling to $390 billion. The difference in volumes captured by the two data providers stems from varying methodologies that highlight specific market segments.
Mirroring the trend in the BSL market, behind the headline grabbing numbers was a jump in opportunistic transactions, as borrowers took advantage of market conditions to reduce interest costs. For instance, KBRA DLD reported that refinancings made up 44% of volume, which, combined with dividend activity, made up half of last year’s volume, compared to 28% in 2023. Despite the surge in refinancings, LBOs and other M&A deals also increased YoY, though they represented a smaller share of total lending (46% vs 70% in 2023). LBO volume rose by 61% to $87.5 billion while other M&A grew by 10% to $52 billion. M&A activity, as measured by deal count, was driven by borrowers with EBIDTA less than $100 million. According to LSEG LPC, LBO direct lending increased 66% to $55 billion, with direct lending capturing 90% of middle market LBO activity, compared to an 80% share in 2023 and 36% share in 2014, when LPC began tracking this activity.
LBO leverage edged higher for most of the year before slightly decreasing to an average of 4.8x in the fourth quarter, per KBRA DLD, while LSEG LPC’s analysis of LBOs reported an average of 4.7x in 4Q, compared to 4.5x a year earlier) with the share of middle market LBOs levered 5x or higher declining to 38% in the quarter.
A strong market tone drove spreads lower in 2024, even though they edged higher in the fourth quarter. Per KBRA DLD, spreads for different segments of the middle market tightened between 58 and 62 basis points to an average of 552 and 525 basis points, respectively, with larger borrowers registering more spread compression. Overall, average direct lending spreads for sponsored middle market borrowers tightened 60 basis points to 525 basis points, according to LSEG LPC. Spreads for direct lender-led large cap loans tightened the most (by 86 basis points to 513 basis points) as the direct lending and BSL markets competed for assets.
While the flurry of activity tightened spreads across both markets, the yield premium between direct lending middle market terms loans (including unitranches) over syndicated large corporate term loans tightened 7 basis points to an average of 244 basis points in 2024, according to LSEG LPC.
While direct lending was traditionally tailored to middle market borrowers, it has grown to include large cap borrowers. Unitranche loan activity, common in the upper end of the direct lending market, surged to $210 billion (from $94 billion in 2023), with large corporate unitranche volume growing to $154 billion, according to LSEG LPC. (LPC defines large corporate as loan packages of at least $500 million.) For the largest borrowers, KBRA DLD, reported volume of jumbo loans (defined as loans of at least $1 billion) spiked by 70% in 2024 to $86 billion, with the average loan size growing to $1.9 billion from $1.8 billion the previous year. Most of the activity centered around the first half of the year, with refinancings and repricings making up 48% and 8% of volume, respectively.
Meanwhile, KBRA DLD News reported that private credit “steals” from the BSL market increased 25% in 2024, as both markets vie for assets. “Steal” activity peaked in the second quarter, when direct lenders reacted after several borrowers swapped their private loans for BSL loans in the first quarter. Most of “steal” volume was focused on lower-rated loans of varying sizes that are vulnerable in a BSL market that is dependent on ratings-sensitive CLO structures. The competition for assets remains a key theme, with activity in the early months of 2025 bolstered by the migration of several jumbo loans into the direct lending market, which included a rare conversion from the high-yield bond market.
