Private credit funds are using strategies such as reducing margins and increasing leverage to outshine traditional financing sources and compete with the broader syndicated market due to a sluggish deal flow.

The credit spreads have reached historically low levels for top-tier borrowers, with private loans now priced as low as 4.5 percentage points over the Secured Overnight Financing Rate in the US and 4.75 percentage points over Euribor in Europe. Despite expectations of a surge in mergers and acquisitions under the Trump administration, this has not yet materialized.

Private credit managers are progressively replacing bank loans and are extending funding to larger, highly leveraged deals, such as the provision of $2.2 billion in debt by private credit funds led by Ares Management Corp. for Clearlake Capital Group's acquisition of Modernizing Medicine.

While private credit deals usually offer higher spreads due to illiquidity, the abundant capital supply has driven down spreads from previous levels. Leverage ratios have increased, sometimes exceeding 10 times debt-to-earnings, and terms have become more flexible with fewer maintenance covenants and broader definitions of earnings.

Private credit lenders are exploring various options such as increasing leverage, offering payment-in-kind toggles, and permitting dividend recapitalizations to attract borrowers. Though deal flow is picking up slightly, it still lags behind previous levels, leading to fierce competition among lenders to secure assets in a supply-demand gap environment.