Banks Are Still in the Deal

The bank–private-credit connection is easiest to see in the details of a financing package: a private lender may provide the term loan while a bank supplies a revolving line, or several lenders may share one borrower in a club deal. This chapter focuses on what those arrangements reveal and what they do not. The reader should be able to identify direct and contingent bank exposure, understand why private and bank lending can be complementary, and avoid treating a large bank commitment as a realized loss.

A borrower can need two kinds of credit

A term loan supplies a defined amount of financing for a defined period. A revolver is a credit line that the borrower can draw and repay as working-capital needs change. The two instruments solve different timing problems. A private-credit fund may be well suited to negotiating a bespoke term loan that reflects the borrower’s risk and cash-flow profile. A bank may be willing to provide a revolving line that supports ordinary liquidity needs. In that arrangement, the bank is not simply replacing the private lender, and the private lender is not simply replacing the bank.

The supplied loan-level evidence points to this division of labor without proving that it is the only explanation. Club deals—deals involving more than one lender—rose for both secured and unsecured lending and accounted for about 40 percent of all such deals by late 2024. Revolvers also became more common. A deal was more likely to include a revolver when it was a club deal, and the likelihood was higher still when at least one bank participated. About 10 percent of all secured loans were revolvers, compared with about 20 percent of secured club deals with banks. Among unsecured loans, the corresponding comparison rose from about 5 percent to more than 15 percent.

The pattern makes economic sense. A borrower may want one lender to structure a longer-term cash-flow loan and another to provide a line that can be drawn when receipts and expenses do not arrive together. Multiple lenders can also spread the amount of a larger financing package. But the arrangement creates a shared exposure to the same borrower. If the borrower’s business weakens, the term-loan lender and the revolver provider may face different contractual claims, yet both are looking at the same operating cash flow.

Consider a stylized financing package for a middle-market company. Several private lenders join a club to provide the term financing, while a bank commits a revolver for seasonal working-capital needs. When the company’s receipts arrive as expected, the revolver may remain largely unused and the private lenders mainly observe the borrower’s scheduled payments and covenant performance. The bank still has a relationship with the borrower, but its exposure is contingent on a draw. The private lenders carry the longer-lived term exposure, but they too benefit from the bank line because it gives the borrower another way to manage timing differences.

Now change only the borrower’s operating conditions. Receipts arrive late, so the company draws the revolver. That draw is not automatically a default or a loss; it is the line doing the job for which it was arranged.