A Story About the Drongo, the Meerkat and Debt Markets

On the plains of Africa you’ll find a surprising cooperation between two typically adversarial animals—the drongo bird and the meerkat. What makes the relationship especially vexing is that they both covet the same food. But instead of being fierce adversaries, they maintain a symbiotic partnership. When predators to the meerkat are in the vicinity, the drongo bird will give out a warning cry, alerting the spirited mammals of the danger. The meerkats quickly scurry back to their burrows, and in their haste often drop a bit of food. The drongo swoops in and grabs the free meal, while the meerkat huddles in his hole avoiding the predator. A win-win.

In a similar manner (albeit generally not on the plains of Africa), the relationship between broadly syndicated loans (BSL) and direct lending (DL) could be considered more symbiotic than adversarial as well. While in recent months the media has presented it as an either-or situation, with headlines like “Private credit’s golden era may face strain amid a resurgence in the BSL market,”1 it is not necessarily so binary. In many instances borrowers can have their BSL cake and eat DL as well.

Increased deal flow—a win for credit investors

As banks increase their risk appetite, which they have in recent months given the strong macroeconomic backdrop, they will start putting more capital into the market in the form of BSL commitments. This bank action in some ways acts as a lubricant for the merger-and-acquisition (M&A) machine. The animal spirits come back and the pie grows. While DL may lose some share of the market to BSL as a result, in my experience there are enough deals with enough spread to keep both the drongo fat and the meerkat happy (Exhibit 1).

Exhibit 1: The Deal Pie Is Bigger