Wall Street Takes on New Role as Private Credit Matchmaker

(Bloomberg) - Banks have found another way to fight back after private lenders grabbed a growing share of the lucrative leveraged-acquisition-financing business.

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Citigroup (Citigroup Inc.) and Goldman Sachs (Goldman Sachs Group Inc.), their promotion of direct lenders can be summarized as follows: We can use our large network of corporate clients to help you find issuers who want to finance, and 鈥竝糹ke that鈥檛 we can help them with all of the formalities necessary to obtain a personal loan, but with a fee.

This is the latest move by the big banks to recapture lost business in their leveraged loan divisions. Historically, the largest acquisitions have been made through junk bonds and leveraged loans, which are arranged by the big banks and then syndicated to a large number of investors. Leveraged finance and related operations account for about one-third of Wall Street investment banks' operating expenses.

But private lenders have taken more of the business, forcing banks to consider other ways to get involved. In addition to counseling direct lenders and small companies, firms such as Wells Fargo and Barclays Bank have formalized their partnerships with private credit firms to gain a foothold in the market. In addition to parking a portion of its own balance sheet to originate private credit transactions, JPMorgan Chase & Co. was always on the lookout for a name partner.

"What we bring to the table is a big, deep generator that can turn the dice when the broader syndicated market doesn't make sense for certain borrowers," said John McAuley, Citi's director of debt capital markets.

More info JPMorgan and Citi are copying the private credit handbook

As the pace of acquisitions slows, direct lenders are scrambling for lending opportunities. A recent survey by Barclays found that private credit funds are sitting on a record $430 billion in uninvested capital, which they have raised over five years of exponential growth.

Private credit funds have long been associated with private equity firms and have been able to find opportunities to lend to acquired companies. However, banks may have relationships with other privately held companies (e.g., family businesses) about which direct lenders have less knowledge.

"This is where banks can create value," said Kipp deVeer, credit officer at Ares Management Corp, one of the largest players in the $1.7 trillion private credit market.

Banks can be a one-stop shop for companies looking to raise all kinds of capital, and Ares-backed Press Ganey has asked Barclays to help it find a lender willing to give it $1 billion in low-grade preferred equity to take on higher-priced subordinated debt. Goldman Sachs is working with Blackstone Inc. on a new loan for the company.

Citi also used its existing leveraged finance relationships to privately fund a $516 million Northern Margin Term Loan for Pitney Bowes Inc. as part of the Gannett Co. debt package, according to the people familiar with the matter, which was also validated by a $516 million Northern Margin Term Loan in the private market.

Read More Wall Street Recovers $16 Billion in Lost Private Credit Deals

For banks facing tighter capital limits after the 2008 global financial crisis, counseling borrowers rather than lending to them was a way to reduce risk by taking loans off the books.

At the same time, Wall Street lenders were caught in a trading drought that lasted more than a year as high interest rates discouraged new acquisition deals that would have brought them additional income from fees with direct lenders. This forced leveraged bankers to arrange repricing and refinancing, which often paid lower fees.

Consulting also allows banks that originate loans to collect fees from both issuers and direct lenders. According to people with knowledge of the market, even large direct lenders sometimes split their fees with the banks that brought them deals. They are sometimes willing to share 25 to 75 basis points of fees with banks, according to people with direct knowledge of these transactions.

Marc Chowrimootoo, director of mass managers and manager of the private credit investment group at Hayfin Capital Management LLP, was reluctant to give up the right to initiate the deal to the bank, which he said would come with a corresponding fee.

He said his firm had included banks in loan panels on its own deals, "but that's very different from paying fees and outsourcing deal origination."

Despite some recent deals, consulting is still a family business on Wall Street. Neither Citigroup nor Goldman Sachs has plans to hire a team dedicated to private credit advice. At Citigroup, leveraged finance bankers Scott Slavik and Justin Tichauer are incorporating the work into their portfolios. Goldman Sachs investment banking division of the global financing group 蓆主尅-Vivek Bantwal said Goldman Sachs for small and medium-sized customers advisory bankers can also provide private credit loans.

"It's in the same tent," says Bantwal, "and we didn't need to expand the mold to do it.

(An item has been added to the table of relevant reports, and the heading in paragraph 5 was corrected in the previous version)

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