Welcome back to the desk post-Labor Day. Hope everyone had a great holiday weekend.
See below for the Fountain Gate Advisors’ latest pulse on the credit markets across the various pockets of debt capital available to middle market borrowers.
- Relationship managers at regulated banks are not being pushed to grow loans. Banks are more focused on deposits, and competitive pressures to pass through more rate are resulting in more deposits needed to move the needle on relationship profitability. Arrangers are finding that historically reliable club deal participants are being much choosier on new deals. Additional regulatory requirements are adding friction to the day-to-day functioning of credit portfolio management departments with unclear risk management benefit.
- Private Credit
- Active push and pull within private credit firms between business development functions desire for more deal volume and heightened scrutiny from investment committees. Clearing deals are featuring the full bingo board of lender friendly trends (lower loan-to-value percentages on buyout transactions, higher original issue discounts, stronger call protection, and tighter covenant structure).
- Institutional Loans
- Decent pickup in leveraged loan activity in August. Supply/demand imbalance from light M&A activity has facilitated some borrower friendly repricing/recap activity in the larger cap end of broadly syndicated loan market. Ability to retain exposure to up pockets of market movement an underreported advantage of BSL vs. private credit for borrowers with the scale and credit quality to access it in the many articles ringing the victory bell for private credit.
- Credit Quality
- Velocity of credit migration to special assets groups of regulated banks and private credit funds is picking up. The common story of credit deterioration in the current market is a ‘business specific factor’ combining with higher interest costs driving debt service / fixed charge coverage weakness and liquidity pressure. Each ‘business specific factor’ is different, but tends to be a lingering impact of direct cost inflation or related second order issue while demand and/or pricing power normalizes.
Fountain Gate Advisors is extremely plugged in to the various factors driving the current state of lender risk appetite, and is standing ready to advise founder and sponsor backed companies on transactions supporting growth, acquisitions, or restructuring existing debt. We welcome introductions to founder backed businesses or sponsors who would benefit from thoughtful, independent capital structure advice.