Grids: the telltale sign of growing competition in private credit markets  

So far 2024 has proven to be a slow year for deal makers. Refinancings and repricings have kept dealflow going despite low volumes of M&A. 

Liquidity in the private lending market remains strong and this, coupled with a very constructive CLO and bond market backdrop currently, has led to intense competition in the private credit markets. 

With more than 750 institutions and 13k active users, Termgrid offers unique insights into the private credit market. One of the core functionalities of the platform enables sponsors and lenders to negotiate terms by exchanging grids online. Updates and changes are easily tracked with our heat map and red line functionality. 

Grid exchanges

Our exclusive data shows that from Q4 23 to Q1 24 there has been a reduction in deals that progress to long form documentation after just the first version of the grids. From 85% in Q4 23, an average of 78% of deals progressed straight to long form in Q1 24.

In Q1 24 the number of deals requiring further iterations of the grid all increased. 12% of deals needed two iterations of the grid; 6% needed 3 and 3% needed 4 – in Q1 2024. This compares to 9%, 4% and 2% respectively in Q4 23. 

^{Chart: % deals reaching each version of grid} 

“With the growth and spread of European private capital, we have seen an increase in the size and volume of private credit deals being undertaken. We have also seen the number of lenders competing for deals grow substantially. 

“In this competitive environment, grids are an efficient way for sponsors to get to key terms quickly on a deal. Grids are now an integral part of many processes and we expect that to continue,” explained Alexander Griffith, partner, Proskauer. 

Market participants have also suggested that this competitiveness can be seen in a gradual loosening of terms, following a trend seen in the broadly syndicated loan market. 

As private credit funds increasingly go head to head with the broadly syndicated loan market, it is perhaps natural that terms have come under pressure. Observers have noted pressure around cure rights, covenant mechanics, margin ratchets, reporting requirements, EBITDA adjustments, and prepayment regime. 

Increased lender competition

Looking at the grids from a lender perspective, Q1 24 shows an increase in the percentage of lenders going to the second and third versions of the grid. So the numbers of lender parties at each stage are growing reflecting the increased competition in the market. 

Some believe that this is simply a sign of the maturity of private credit and its ability to compete in even the largest deals. 

“This data shows that private credit has become a mature market and is a long lasting part of the capital structure.

We are seeing terms become more standardized so relationships and reputation really matter. As a lender, if you make it past round two of the grid, call everyone you know at the sponsor,” explained Ranesh Ramanathan, co-lead of Akin’s Special Situations and Private Credit Practice, Akin Gump.

^{Chart: % lenders receiving version of grid} 

As we have previously noted, academic research supports the idea that private credit is a relationship-driven business. These relationships appear to be playing a part earlier in the process as sponsors and lenders start that relationship process before terms are agreed. 

So it appears that grids perform a useful function for all parties to the deal, enabling terms to be quickly and easily agreed while leaving more valuable time for building the relationships that create long term value in private capital. 

We hope that our data offers a little insight into the “science” of negotiating a deal while private capital professionals practice the art. 

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