The spread between unitranche loans and first- and second-lien debt financing is approaching historic low levels, according to Barings BDC Inc.
"Traditionally, unitranche executions provide a level of premium pricing when compared to first-lien, second-lien structures, as a one-stop financing solution provides private equity sponsors with ease of execution," said Barings BDC President Ian Fowler on a shareholder call today.
The trend is a result of intensely competitive market conditions for direct lending assets.
"Today, the spread differential between a unitranche transaction and a traditional first-lien, second-lien execution is approaching all-time tights," Fowler said.
"Furthermore, first-lien pricing is tightening at both the upper and lower ends of the middle market."
In response to a question on first-lien term loan spreads based on earnings level, Fowler said businesses generating $20 million to $29 million were particularly attractive from a relative value perspective, and had been a focus area. Spreads may have widened for this group of companies.
"The problem with the lower end of the middle market is there's just so many players in that space. Everyone is trying to put money to work. ... When you look at spread compression at that lower end, it just gets insane because of so many players in that market just trying to put money out the door," Fowler said.
Barings BDC's competitors were generally trying to move upmarket, to lend to larger middle-market companies, resulting in spread compression there, too, Fowler said.
Fowler made the comments during an earnings call today on the business development company's results for the quarter ended June 30.
Originations totaled $264 million in the second quarter, against $242 million of sales and prepayments, of which $156 million were sold to a joint venture. In 2019, Barings BDC formed a joint venture with the State of South Carolina Retirement System to invest in private debt and syndicated loans.
Most of the prepayments were due to sponsor-to-sponsor buyouts, as opposed to sponsors exiting a business as a result of IPOs or sales to strategic buyers, Fowler said.
"We have a lot of strategies around retaining good assets," Fowler said. "We're going to do everything we can to retain that asset. And that's a really key strategy in a market like this."