Banks’ response to private credit could be disappointing


The headquarters of Germany’s Deutsche Bank is pictured in Frankfurt, Germany, September 21, 2020. REUTERS/Ralph Orlowski/File Photo

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LONDON, Aug 4 (Reuters Breakingviews) – Investment banks are considering how to battle private credit, the $1.2 trillion industry replacing them in the lucrative buyout finance business. Yet ideas pioneered by JPMorgan, Deutsche Bank (DBKGn.DE) and others bring new challenges.

Direct lenders, often managed by asset management groups such as Blackstone (BX.N) and Apollo Global Management (APO.N), are pushing banks out of big leveraged buyout deals. One example is Thoma Bravo’s purchase of Anaplan for $10.7 billion. Borrowers appreciate the certainty of using such vehicles, which typically hold loans for life. Investment banks, on the other hand, must sell loans to pension funds and asset managers, and may raise interest rates during the syndication process if debt markets are unstable. There’s a lot to lose: Banks earned $7 billion in leveraged lending fees in the first half of 2022, according to Refinitiv.

Bankers are experimenting with several responses. JPMorgan makes loans and holds them to maturity rather than trying to sell them, the Financial Times reported. This allows lenders to offer fixed rates to borrowers. Second, others like Deutsche and Credit Suisse (CSGN.S) raise their own private credit funds to collect asset management fees.

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JPMorgan’s approach is essentially a return to traditional bank lending. But it ties up capital on the balance sheet for the life of a loan. In contrast, the current debt-selling standard allows banks to recycle capital several times a year and earn an average of 1% commission each time, based on Refinitiv data, boosting returns. Meanwhile, shareholders and regulators may worry about a bank’s exposure to risky loans the longer a loan stays on the balance sheet.

Raising a fund, as Deutsche Bank and Credit Suisse do, at least leaves the risk to third-party investors. And this is not new: the asset management branch of Goldman Sachs, for example, does private credit. But some banks may struggle to stand out in a crowded field. Giants like Apollo, whose credit arm manages $373 billion, will be hard to catch. According to Preqin, around 1,000 private debt funds were raising funds at the end of June.

Admittedly, banks are not always in competition with private credit. They can earn money by lending to funds, or even by underwriting large private transactions that require multiple funds. The main cause for hope, however, is that private credit managers might be on their skis. According to a recent survey, almost two-fifths of direct lenders would finance borrowers whose level of debt exceeds the exorbitant figure of 7.5 times EBITDA. There is a risk that insurers or pension groups that invest in private credit funds pull out when defaults increase. This would relieve investment bankers.

(The author is a Reuters Breakingviews columnist. The views expressed are his own.)

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JPMorgan’s investment bank has set up a unit to make leveraged loans and hold them to maturity, the Financial Times reported on July 20. The plan aims to counter the threat of private credit funds run by groups like Ares Capital Management and Apollo Global Management. .

Deutsche Bank plans to raise a private credit fund, Bloomberg reported on June 2.

On July 13, Credit Suisse said its asset management arm had raised a $1.7 billion private credit fund.

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Editing by Neil Unmack and Streisand Neto

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