Private credit yields headed to 10% in response to shifts in syndicated market

Direct lending yields are turning higher again as private credit reprices alongside extended volatility in liquid markets. Widening spreads and fees are poised to lift yields back into double-digit territory.

The average yield for large-cap private loans—which compete directly with syndicated credits—dropped to 8.9% in February, according to KBRA DLD, the lowest point since August 2022 when the Fed began a series of steep hikes. But the average is about to reverse course.

Spreads for new issues are moving 50 bps to 100 bps wider, or more for software and off-the-run companies, according to lenders. Fees are widening in a similar range.

The recent $650 million term loan for Nexthink is stamped at S+550. The financing was led by Blue Owl Capital to support Vista Equity Partners’ buyout of the software company. Sources say the deal was talked at S+450 a month ago. Meanwhile, the roughly $5.1 billion private loan behind Thoma Bravo’s acquisition of WWEX Group is priced around S+575, according to sources.

In January, new issues were being pitched largely at S+450-475, with fees inside 1%.

Historically, direct lending loans have averaged about 9%-10%. In 2023, the average spiked to highs of more than 12%, according to KBRA DLD, due to interest rate hikes that lifted the base rate to roughly 5.2% from lows of less than 25 bps. Today, the SOFR base rate is 3.7%. —Kelly Thompson