Investment Banks Pitching Broadly Syndicated Refinancings of Risky Private Credit

Investment banks are making a push to refinance some of the riskiest private credit deals, aiming to lure business back from direct lenders. With conditions in the market improving, banks like Goldman Sachs are pitching broadly syndicated refinancings to buyout firms in Europe.

Luke Gillam, co-head of EMEA credit capital markets at Goldman Sachs, highlighted the opportunity to use public markets to refinance private credit instruments at a much cheaper cost. This includes refinancing private payment-in-kind debt as PIK toggle bonds, which offer borrowers the option to delay interest payments.

While PIK bonds have been rare in Europe’s high-yield bond market, they have been a common feature in private credit financings. Banks are now targeting junior debt that was privately placed by direct lenders, offering cheaper debt thanks to a booming leveraged finance market.

One recent example is Italian packaging firm Fedrigoni SpA, which sold €300 million of PIK toggle notes at lower prices than typical private credit alternatives. The company plans to use the funds to refinance an expensive loan and maintain flexibility for future mergers and acquisitions.

Some banks are even pitching PIKs as a way to fund dividends, a strategy that was popular before the 2008 financial crisis. However, investors must be cautious as PIK bonds carry the risk of missing out on cash payments and dealing with a riskier borrower in case of default.

Despite the potential risks, PIK bonds offer companies the ability to increase debt without immediate debt servicing burdens. With careful management, companies can use the extra cash to improve their business and eventually refinance a larger debt pile down the line.

As banks continue to target private credit business, investors and borrowers alike must weigh the benefits and risks of PIK bonds in a market where risk premiums are tight but interest rates are rising.