Private Credit's '24 Tech Resolutions:

Refis, LBOs, JVs

Wall Street in New York City. | IM Photo/Shutterstock

Union Square's Michael Moore and Mike Meyer discuss the future
of private credit, from refinancings to LBOs and even partnerships
with banks.

By Chris Nolter
January 16, 2024 08:16 PM

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 As private credit's bull run enters 2024, the asset class faces opportunities and dry
powder — as well as some questions.

“You've got a massive maturity wall coming,” Union Square Advisors LLC banker
Michael Moore said. "Not so much in 2024, but really in 2025 and 2026."

Interest rates and other factors have pushed more companies into the CCC credit
markets — a sweet spot for private credit. Refinancings such as video technology
company Synamedia's $460 million private credit raise in December could become
more common, Moore suggested.

Meanwhile, private credit assets under management topped $1.7 trillion in mid 2023
with $500 billion in dry powder, investment data company Preqin Ltd. reports.
“There's been so much capital that's been raised to be deployed in the space,” Moore
said.

“You've got a massive maturity wall

coming.” MICHAEL MOORE, UNION SQUARE ADVISORS

"Private credit has really displaced the banks," Union Square's Mike Meyer said. "To
do a large LBO, you don't need the banks anymore." Expect competition with the
syndicated loan providers in buyouts and other arenas — and maybe even
partnerships between banks and private credit funds.

The Looming Wall

Private credit is more expensive than syndicated debt. For reference, Moore estimates
that financing for a best-in-class private credit buyout would cost 200 to 250 basis
points more than a best-in-class syndicated LBO.

In the plus column for borrowers, however, private credit doesn't require a rating and
typically closes faster and with greater certainty than syndicated debt.

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 Companies rated B3 or below in Moody’s Investors Service Inc. ratings scheme or B-
and lower on the scale of S&P Global Inc. (SPG) are the most frequent private credit
borrowers.

The market is about to get lively. S&P reports that nonfinancial debt maturities rated
B- and lower in the U.S. and Europe will double from $83 billion in 2024 to $169
billion in 2025.

“[Private credit has] raised a lot of capital

that needs to be put to work.” CHRISTINA PADGETT, MOODY’S

At the same time, S&P analyst David Tesher noted in a December report, syndicated
loan issuance in the CCC range is at its lowest level since 2010 in the U.S. and
Europe.

“Private credit is looking to take up some of the slack,” Tesher wrote.

Rivalry between the syndicated loan market and the private credit market has been
building, Christina Padgett of Moody’s Investors Service said.

“If anything it could be even a little more intense this year,” Padgett said. “If rates
continue to moderate, that will strengthen the syndicated loan market but it won’t
deter the private credit market. They have raised a lot of capital that needs to be put to
work.”

Leveraged buyouts could be a battleground. Sponsors may explore dual path

financing for LBOs, Padgett suggested, weighing private credit against syndicated
loans.

Case Study: Synamedia

Synamedia's $460 million refinancing in December illustrates the potential for

companies to refinance broadly syndicated debt in the private credit markets, said
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 Moore. Union Square advised the U.K. video technology company.

Synamedia, which Permira carved out of Cisco Systems Inc. in 2018, refinanced
existing debt put in place at the time of the LBO.
Adams Street Partners LLC, NorthWall Capital and PNC Bank Corp. led the
investment.
Synamedia got ahead of the maturities. The first lien was due in October 2024,
and the second about 90 days after.

“From a pure balance sheet perspective, it resets the capital structure, takes out all the
existing debt, gives the company runway to focus on the business and fully extends all
their maturities,” Moore said.

B3 and Below

With rising interest rates, the field of private credit candidates grew last year.

Moody’s rated 240 companies B3 negative and below at the end of the third quarter,
up from 177 such ratings a year earlier. For reference, the ratings agency downgraded
Synamedia from B3 to Caa1 in October ahead of its refinancing.

Most of the companies on Moody's list have PE backing. Technology and media are
the fourth and fifth most prevalent industries, representing 9.6% and 5% of the
companies.

Tech and media companies rated below B3 include:

GoTo Group Inc., rated Caa1. Elliott Management Corp. and Francisco Partners
Management LLC acquired the company through a $4.3 billion LBO in August
2020.
Anthology Inc., rated Caa3. Veritas Capital Fund Management LLC, Providence
Equity Partners LLC and Leeds Equity Partners LLC formed the company
through the October 2021 merger of Anthology with Blackboard Inc.
RSA Security LLC, rated Caa1. STG Partners LLC and others purchased the
company from Dell Technologies Inc. (DELL) in September 2020 for $2.1
billion, and Clearlake Capital Group LP invested in August 2021.
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 Veritas Technologies Corp., rated B3. Carlyle Group LP (CG) bought the
company from Symantec Corp. for $7 billion in January 2016.
Public companies include Skillz Inc. (SKLZ), rated Caa2. The Las Vegas mobile
gaming platform has a $107 million market cap and has $130 million in notes
with a roughly 12% interest rate that come due in December 2026.

Rates, Recessions and Partnerships

While the wall of maturities presents an opportunity, questions remain this year for
private credit investors and borrowers.

“Fast forward to two years from now, I bet

every major bank that has a leveraged
finance business has some kind of private
credit arm.” MIKE MEYER, UNION SQUARE ADVISORS

For one, the impact of lower interest rates. If rates drop, obviously, so will private
credit returns. The flip side is the companies will perform better because their interest
expense is lower.

“The asset class grew like crazy when interest rates were 1%. It’s continuing to grow
— and grow even more rapidly — with interest rates at 4%, 5%,” Union Square's
Mike Meyer said. “So it should continue to grow.”

Meanwhile, a recession would be a testing ground. Private credit was a much smaller
asset class during the financial crisis and the Covid recession was a relative blip.

“The asset class hasn't been this size through any kind of real recession yet,” Meyer
said. ”So it'd be interesting to see how it does during recession.”

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 Lastly, banks may seek a piece of the market — though they would have to be
creative.

“The banks can't just use their own balance sheet, because the regulators won't let
them,” Meyer said.

However, he suggested, they could do off-balance-sheet joint ventures with private

credit institutions or hedge funds to get a piece of the business.

“Fast forward to two years from now,” Meyer said, “I bet every major bank that has a
leveraged finance business has some kind of private credit arm.”

TAGS PRIVATE EQUITY DEBT FINANCING EXCLUSIVE INTERVIEW

SOFTWARE AND SERVICES INFORMATION TECHNOLOGY NEW YORK
$ 250-500 MILLION UNIQUE ANALYSIS

COMPANIES

Adams Street Partners LLC Anthology Inc. Blackboard Inc. Carlyle Group LP

Cisco Systems Inc. Clearlake Capital Group LP Dell Computer Corp. Dell Technologies Inc.

Elliott Management Corp. Francisco Partners Management LLC GoTo Group

Leeds Equity Partners LLC Moody's Investors Service Inc. PNC Bank NA Permira

Preqin Ltd. Providence Equity Partners LLC RSA Security LLC S&P Global Inc.

STG Partners LLC Skillz Inc. Symantec Corp. Synamedia Union Square Advisors LLC

Veritas Capital Fund Management LLC Veritas Technologies Corp.

PEOPLE

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 Michael Meyer Michael Moore

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