Davis Polk partner and Finance co-head Jason Kyrwood was profiled in Bloomberg’s “Credit Brief” newsletter discussing recent trends in the direct lending and syndicated loan markets.  

Discussing what he is seeing in high-yield debt underwriting, Jason pointed to changes in deal terms to account for the risk of long-dated commitments. “We are seeing things go into documents like step ups in rates after certain periods of time, increased flex after certain periods of time, even escrow demands and escrow funding arrangements that will allow you to close the deal and get funded returns before too much time has passed.”

But Jason explained that in a down market, that type of flexibility may not be enough. “The one thing that may save you is flexibility in the capital structure,” he said. “Having that kind of flexibility turns out to be super important. And that is somewhere we have seen focus again in the documentation, making sure that there is at least some flexibility on the underwriter’s part to unilaterally decide: we need to hit the bond market for some portion of this or we need to be able to pull some of that back into the loan market or change priority.”

Addressing how the dynamic between the broadly syndicated loan market and direct lending changed this year, Jason noted, “One of the really fascinating things we’re seeing more now as the broadly syndicated markets have started to stabilize is that some of these direct lending deals are being refinanced before they even close, in broadly syndicated markets, using best-efforts financing.”

Direct Lenders Look for Protections Against Losing Deals: Q&A,” Bloomberg (April 21, 2023) (subscription required)