(Bloomberg) — A recent debt sale by KKR & Co. illustrates the lengths to which Wall Street firms are willing to go in order to retain their leverage in underwriting, especially in light of competition from private credit sources following turbulent market conditions.
After banks, including Jefferies Financial Group Inc. and Citigroup Inc., lost a significant €1.1 billion ($1.24 billion) financing deal to direct lending competitors, they managed to stay in KKR’s good graces by offering low-fee revolving credit for the acquisition of Karo Healthcare. In return, KKR has promised to share a portion of the lost deal’s fee with these banks, which were primarily outbid by private lenders led by Apollo Global Management Inc., as per sources close to the negotiations who wished to remain anonymous due to the confidential nature of the matter. Reports indicate that banks will receive about 40% of the 1.75% underwriting fee. This atypical arrangement underscores the strategic efforts by banks to sustain relationships during periods of market uncertainty that could yield future business opportunities.
Typically, banks avoid offering undrawn credit facilities with minimal fees, as such agreements can tie up capital that could otherwise be allocated to more lucrative lending opportunities. In leveraged transactions, if banks do provide such facilities, they usually do so alongside higher-yield term loans or bonds. However, in the current climate, Wall Street’s leveraged finance teams, which had previously focused on high-fee deals that contributed significantly to investment-banking revenue, are keen to safeguard their competitive edge, especially after facing losses from “hung deals” last year. Many now regret their hesitancy to support acquisitions and provide undrawn credit while private lenders advanced their foothold in the market. “Banks are continuously adapting,” remarked Jeremy Duffy, a partner at the law firm White & Case LLP, specializing in leveraged finance. “They are acutely aware of the rise of private credit and are adjusting their strategies accordingly.”
The volatility of the market in 2025 has already led borrowers to favor private credit funds, which are perceived to handle fluctuations more adeptly than traditional banks. For instance, Karo’s bank lenders, including HSBC Holdings Plc and KKR Capital Markets, extended approximately €175 million in undrawn credit facilities, while the €1.1 billion of drawn debt they had committed for the acquisition remained unused. According to sources, KKR had yet to finalize the agreement before ultimately choosing a private unitranche structure—an arrangement that integrates both junior and senior debt—of the same amount. Over ten lenders, including Apollo, Jefferies, and CVC, participated in what may be the most competitively priced European direct lending deal to date, despite the prevailing market challenges. KKR opted to compensate some traditional lenders with a fee, recognizing that they had assumed the risk for about ten days in early April, prior to private lenders stepping in. Representatives from KKR, HSBC, and Citi did not provide comments, and Jefferies was unavailable for immediate response to inquiries.
The potential for undrawn loans to become a bargaining tool for banks has led to growing speculation regarding when they might encounter scenarios similar to that of Karo. A key situation currently under observation is the acquisition of Urbaser, a Spanish waste management services firm. In this case, both private credit funds and banks are vying to underwrite a deal that includes over €2 billion of drawn debt, alongside an estimated €1.5 billion in guarantees and revolving credit facilities, as indicated by knowledgeable sources earlier this month. “It’s not unexpected for banks to adopt a long-term perspective on fostering and maintaining relationships within this market,” noted Sabrina Fox from Fox Legal Training, a specialist in leveraged finance. “Even if that leads to short-term losses, the potential for greater long-term rewards is much higher.”
Week In Review During the recent Milken Institute Global Conference, major figures in private credit discussed their next “golden opportunity” as they hunt for favorable investments amidst recent market fluctuations. Sales of high-grade corporate bonds in the U.S. surged to around $45 billion this week, marking the highest volume since March. This uptick signals a reopening of markets that had been largely inactive throughout April due to escalating trade tensions. Even companies likely to face pressures from global tariffs, such as Apple and General Motors, have tapped into this revived market. The thawing conditions are prompting banks that were left holding $6 billion in buyout debt during tariff-related turmoil to explore avenues for offloading this debt to investors. Recent results from business development companies indicate that firms financed in the private credit sector have started exhibiting signs of distress in the first quarter. Historically, buyout firms adhered to the principle of prioritizing lenders during times of financial trouble. However, that practice is now fading, with many creditors increasingly pushed down the priority list.
Citigroup Inc. is intensifying its lending efforts to private equity and credit groups, attempting to catch up with rivals like JPMorgan Chase & Co. and Goldman Sachs Group Inc., after having been relatively inactive for several years. JPMorgan is poised to lead approximately $6.5 billion in debt financing to facilitate private equity firm 3G Capital’s acquisition of footwear manufacturer Skechers. This week also saw several notable bankruptcy filings: Rite Aid Corp. entered bankruptcy for the second time in less than a year after a restructuring effort aimed at revitalizing the struggling pharmacy chain. The company received court approval for a speedy process to sell customer prescription data to competing pharmacies as it prepares to either sell or close its locations. WeightWatchers, once famous for its celebrity-endorsed diet plans, also filed for bankruptcy, struggling to keep pace with the popularity of medications like Ozempic and the influence of fitness personalities on TikTok. Additionally, Synthego Corp., a producer of gene-editing tools for researchers, filed for bankruptcy and intends to sell itself to its primary lender, an affiliate of private equity firm Perceptive Advisors. Sumitomo Mitsui Banking Corp. is collaborating with Monroe Capital and MA Financial Group to pursue $1.7 billion in lending ventures within the rapidly expanding private credit market.
On the Move Morgan Stanley Investment Management has appointed Peter Campo as managing director and head of floating-rate loans. Mitsubishi UFJ Financial Group has recruited John Clements from Barclays to lead its collateralized loan obligations division. Deutsche Bank AG has hired Nicola Baker from Citigroup Inc. to bolster its U.S. private banking efforts as Germany’s largest lender aims to increase its engagement with high-net-worth clients. Hilltop Securities has designated Jason Lisec to spearhead municipal sales and trading. Jason Wen of Toronto-Dominion Bank, head of U.S. investment-grade credit sales and trading, will depart in the coming months as part of a restructuring within the firm’s global markets division. Nomura Holdings Inc. has brought on Moritz Westhoff from Bank of America Corp. to oversee its U.S. rates business. Investment banker Gary Antenberg is transitioning to Royal Bank of Canada from Barclays Plc, focusing on clients in insurance and alternative asset management. Matt Maloney, a partner at Gramercy Funds Management, is leaving after a decade with the hedge fund that specializes in emerging markets.
–With assistance from Rheaa Rao.
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