When is a direct lender not a direct lender?

In the words of a high-yield banker in London this week, ‘there’s been a lot of nonsense about direct lending this year, hasn’t there?’

Even as a purveyor of some of this nonsense, it’s hard to disagree.

The idea that direct lenders could capture all of the diverted deal flow from the syndicated loan and high-yield bond markets when they shut down has obviously never been realistic. That said, competition for some of the biggest and best sponsor-backed deals has intensified, and direct lenders have in places had the upper hand.

After this week’s developments, however, when MUFG set up a direct lending operation, we may need to start using different language to describe this competition, because the narrative that it’s just direct lenders against the banks collapses when the banks begin to set up “direct lenders”. loan groups.

Many banks, including MUFG, have long provided leveraged loans from their balance sheets. You can argue the semantics of whether it could be called direct lending, but that’s not how the market has generally understood the term for the past 10 years.

Some banks, notably Goldman Sachs, have created direct lending units in the past. But these are usually structurally external to the bank, allowing them to raise third-party capital for closed-end funds and operate like their competitors in private institutions, with the advantage of seed capital from the bank. .

One way of looking at it is that the first generation of banks that got into direct lending were rebranding for the benefit of their investors and the next generation are rebranding for the benefit of their sponsoring clients.

Whether there is any tangible benefit to sponsors in terms of the services provided will be the real test. But, for now, the results are about as clear as the nomenclature.