May 18, 2023 - The LSTA/DealCatalyst CLO Conference Day Two Keynote was a fireside chat between LSTA ED Lee Shaiman and Golub Capital President David Golub. While many topics were discussed – portfolio company performance, impact of recent regional bank failures, etc – it was the Broadly Syndicated Loan (“BSL”) vs Private Credit (“PC”) debate that was most notable in today’s market. The conversation focused on whether the trend from BSL toward PC was cyclical or secular. The answer, perhaps, is that it is both. From a secular perspective, there are a number of PC characteristics that private equity likes: rapidity and certainty of execution, limits on information availability and smaller, more manageable bank groups. On the flip side, PC fundraising has been strong, in part because of its higher yields and – perhaps – its somewhat stronger documentation and reluctance to use Liability Management Transactions (thus far at least!). Meanwhile, with net new CLO formation anemic, the BSL market is knocked back on its heels somewhat. And so, the modest new M&A deal flow that has emerged recently has been financed mostly by PC.
But while BSL is down, it almost assuredly is not out. CLO formation and demand will return, particularly as AAA spreads come in, the BSL market will become more attractive – recall that BSL traditionally offers thinner margins to borrowers – and refinancing and market share may shift back toward BSL at that time. And so, as many have noted, BSL and PC are simply two parts of the continuum that is the leveraged loan market.