Activity picks up at the end of the year and terms loosen as competition intensifies

Reorg, a global provider of credit data, analysis and intelligence, has released its 2023 U.S. Direct Lender league tables data. The league tables rank U.S. direct lender activity in 2023 across factors including loan size, use of proceeds and sector. Additionally, the report explores overall deal flow in 2023. With the U.S. Direct Lender rankings report, Reorg is the first to publish rankings across all three global regions, expanding the availability of private credit news, data and analysis available to the global credit community.

U.S. direct lending activity was off to a slow start in 2023, as recessionary concerns, prolonged high-interest rates and subdued M&A activity challenged deal flow in this space. However, with better-than-expected economic growth and moderating inflation toward the end of the year, deal activity rebounded. A third of direct lending activity by deal count during the year was in Q4’23. As the year progressed, the share of larger deals (those with a total deal size above $150 million) increased, reaching 64% of the total in Q4’23, up from 43% in Q1’23. Conversely, the share of lower mid-market deals (total deal size of $150 million and below), declined to 36% in Q4’23 from 57% in Q1’23.

M&A lending represented 72% of the total deal count in 2023, but only 34% of M&A deals were for leveraged buyouts. A disconnect between buyers and sellers’ expectations, among other factors, hindered LBO activity. Direct lenders stayed busy financing add-ons for existing portfolio companies. Refinancings also kept lenders busy in 2023, grabbing 17% of the year’s total deals.

With fewer opportunities to put money to work, terms became more “borrower friendly” as competition intensified, especially for high-quality assets. Spreads on first-lien term loans/unitranches tightened each quarter, closing the year at an average of 589bp, almost 40bp below the Q1’23 level. Discounts also tightened to an average of 98.3 in Q4’23 from 97.5 in the first half of the year. Meanwhile, total leverage widened to 4.9 times in Q4’23 from 4.5 times in Q1’23. In Q4’23, more than half the deals had a total leverage ratio of at least 5 times. That’s an increase from 30% of the deals in Q1’23.

Given the high-interest-rate environment, a lot of focus was placed on coverage ratios in 2023, not only of existing portfolio companies, but also when structuring deals. The average interest coverage ratio on deals done in Q1’23 was just over 2 times. In the following two quarters this ratio declined to 1.84 times, but then inched higher to an average of 1.93 times for deals done in Q4’23.

Darren Maharaj, Director of Leveraged Finance Data at Reorg said, “Private credit has arrived and is here to stay. Market participants have grown far more sophisticated since the lessons of the global financial crisis and they look at the interplay between asset classes, not just through a singular lens. Reorg is delivering the intelligence and tools to help market participants better understand the nuances and opportunities that exist, across the entire credit spectrum from origination to performing and distressed.”

Access the full report here.

About Reorg

Founded in 2013, Reorg is the essential credit intelligence and data asset for the world’s leading investment banks, buyside advisory firms, asset managers and hedge funds, law firms and professional services advisory firms. By surrounding unparalleled human expertise with proven technology, data and AI tools, Reorg unlocks powerful truths that fuel decisive action across financial markets. Visit reorg.com to learn how we deliver rigorously verified intelligence at speed and create a complete picture for professionals across the entire credit lifecycle. Stay current with Reorg on LinkedIn.

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