The private credit market is finding itself competing more directly with broadly syndicated loans, which is leading to the need to sometimes limit call protection to gain/maintain market share, according to a report by global law firm Sidley.
The firm said that as the private credit market grows, and competition among lenders for deal flow is at record levels, “call protection (or the lack thereof) is becoming a unique selling point for private credit lenders to gain a competitive edge for deal mandates over their peers”.
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However, it said a recent trend is that private credit transactions are getting bigger, which is leading to a need to limit call protection.
“Historically, six-month soft call protection was limited to the broadly syndicated TLB market, where institutional investors often did not intend to hold the debt to maturity and could redeploy capital into a liquid market efficiently upon a prepayment,” the firm said.
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“By contrast, private credit lenders in an illiquid market have a longer desired hold period and thus a stronger incentive to seek protections against early prepayments and reimbursement for diligence and redeployment costs. As a result, private credit lenders have historically sought make-whole and hard call protections.
“However, as private credit transactions become larger and competition among lenders intensifies, the private credit market finds itself competing more directly with broadly syndicated loans and as a result sometimes limiting call protection is necessary to gain and/or maintain market share.”
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The firm said that ultimately “lenders should tailor call protection terms to their investment objectives while carefully monitoring market trends and legal developments to ensure their protections remain both competitive and enforceable”.
