Ultimately, spreads on bank-arranged term loans are main relationship-based motivation is retaining deposits – determined by conditions in the market in which they’re which private lenders do not threaten. distributed. And when added to base rates, the associated cash interest expense limits the leverage (debt/EBITDA) The aforementioned trends in balance sheet composition that a 昀椀rst lien loan can accommodate in the current (Figure 12, page 11) should weaken banks’ competitive position in environment. For many capital structures, an increase in this portion of the market. Bank holdings of duration-sensitive bank-intermediated lending necessitates corresponding Treasuries and mortgage-backed securities (MBS) skyrocketed growth in junior capital. In these cases, private capital will in the period preceding the rise in interest rates – partly due still be central to the transaction, but instead of “unitranche” to regulation – leading to catastrophic fair value losses that loans from direct lenders, such participation will come in the have not been recognized for regulatory purposes but reduce form of higher-yielding second liens and preferred securities. earnings capacity and economic capital just the same (Figure 14, This dynamic is a return of sorts to the symbiotic relationship page 13). And while the bank share of most types of loans has between broadly syndicated and private markets that dropped meaningfully over the years, their share of mortgages existed just prior to the pandemic. collateralized by commercial real estate has remained roughly 8 constant, equal to more than half the market. Given the Below the $200 million to $400 million annual EBITDA potential fall-out in the o昀케ce sector, where the “structural” 9 threshold, competition for private lenders is likely to involve vacancy rate is nearly 50% due to work-from-home trends, more commercially-oriented large banks and regional banks many banks may need to jealously guard capital that they might with less fee income to cross-subsidize lending and whose otherwise have been able to commit to new loans. Figure 13. Dispersion in Noninterest Share of Bank Operating Income Figure 13. Source: Carlyle Analysis; Federal Reserve Bank of New York, March 2024; S&P Global, June 2022. There is no guarantee any trends will continue. 8. FDIC (2019). P. 33. 9. Doolittle, T. and A. Fliegelman (2023), “Work-from-Home and the Future Consolidation of the U.S. Commercial Real Estate O昀케ce Sector: The Decline of Regional Malls May Provide Insight,” O昀케ce of Financial Research, U.S. Treasury. 12