BNP Paribas is eyeing a move into private credit, which could provide an alternative source of funding for major M&A deals as traditional bank lending dries up.

The French bank is considering a move into the private credit sector, according to people familiar with the matter. The lending strategy would sit within its investment bank and would likely be a hybrid approach alongside its leveraged finance division, the people added.

However, discussions are still at an early stage and a final decision has yet to be made.

Banks have become increasingly skittish about offering leveraged loans to help companies and private equity firms finance large mergers or acquisitions in recent months. A buoyant period for funding was aided by low interest rates and surging appetite for deals, but more recently inflation, central bank rate hikes and a tougher macro outlook have dented activity.

Some investment banks unveiled losses of hundreds of millions during the third quarter on the back of leveraged loans struck when economic conditions were more favourable earlier this year. In September, Wall Street banks advising on the leveraged buyout of software firm Citrix Systems accepted a loss of $700m on the $8.6bn of loans and bonds offered to the firm.

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The volume of leveraged loans issued in Europe has declined by 47% to $102.9bn during the first nine months of 2022 compared with a year earlier, according to Dealogic. In the US, it has fallen by 30% to $887m over the same period.

Meanwhile, private debt funds have swelled in recent years, with around 1,000 funds globally worth $1.3tn as of March, according to data provider Preqin, up from $842bn in 2019.

Direct lenders, often run by large private equity firms such as Blackstone and Apollo, have been raising large amounts of money, sometimes replacing banks on buyout deals and potentially robbing them of lucrative fees.

Some banks have responded by venturing into private credit themselves. Credit Suisse launched a $1.7bn private credit fund in July, and Barclays was also considering a move into the space, Bloomberg reported in April.

Deutsche Bank also pushed into private credit this year through its asset management arm and Morgan Stanley plans on raising between €2bn and €3bn for a European direct lending fund next year.

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