Welcome to Issue No. 9 of PErspectives—our periodic publication featuring news, trends and legal developments in the private equity (PE) industry. In this piece, we examine the impact of inflation and rising interest rates on terms and pricing in the leveraged finance markets. After a 2021 marked by buoyant debt markets and abundant liquidity, we also take a look at how PE sponsors are adapting in this new environment.
The current financing landscape—with liquidity tightening and U.S. leveraged loan and high yield bond issuances steadily declining—has seen lenders and investors take a step back to assess the effects of market volatility on credit quality and availability. These dynamics, along with the rising cost of debt, are pushing PE sponsors to explore new financing structures and lean on their lender relationships.
With a view to how these developments are impacting PE stakeholders, we explore these and other critical questions:
- How are sponsors working with direct lenders to recalibrate financing expectations and adjust to market shifts?
- What has the volatility in capital markets meant for private debt managers?
- Are terms and pricing pivoting back in favor of lenders? If so, where are sponsors able to hold the line, and what changes have been observed from 2021 to 2022?
- Which alternative debt sources and structures are sponsors exploring to finance deals and portfolio companies?
- What is the outlook for debt markets stabilizing and deal activity levels normalizing over the next 12 months?
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