(Bloomberg) — A KKR & Co. debt sale shows how far Wall Street is willing to go to keep leveraged underwriting business from slipping away to private credit after periods of turmoil.

After losing a €1.1 billion ($1.24 billion) buyout financing assignment to direct lending rivals, banks including Jefferies Financial Group Inc. and Citigroup Inc. kept themselves on the private equity giant’s payroll by agreeing to extend low-fee revolving credit for KKR’s acquisition of Karo Healthcare.

In exchange, KKR will allot them a part of the fee on the deal they lost to private lenders led by Apollo Global Management Inc., according to people familiar with the matter who asked not to be identified because the matter is private. Banks are set to pocket around 40% of the 1.75% underwriting fee, the people said. 

The unusual arrangement hints at efforts to maintain relationships during bouts of market volatility that can win them business later. Banks often steer clear of undrawn credit facilities with negligible fees, agreements that tie up capital that could be used to make more profitable loans. If they offer them at all on a leveraged deal, it’s usually in conjunction with more lucrative term loans or high yield bonds. 

Now, however, Wall Street’s leveraged finance desks, which chased fee-rich deals to reel in a third of investment-banking revenue in recent years, are in no mood to fritter away some of their edge like they did in 2022. After taking losses on “hung deals” back then, they came to regret their reluctance to back acquisitions and provide undrawn credit while direct lenders made inroads into their business.

“Banks are continuing to evolve,” said Jeremy Duffy, a partner at law firm White & Case LLP who advises on leveraged finance. “They are acutely aware of the onward march of private credit and are reacting accordingly.”

Yet 2025’s wild market gyrations have already pushed borrowers toward private credit funds that can ride out volatility better than banks. 

Karo’s bank lenders, which include HSBC Holdings Plc, alongside KKR Capital Markets, extended about €175 million in undrawn facilities. What went unused is the €1.1 billion of drawn debt they’d committed for the buyout of the Swedish consumer-health company. 

KKR hadn’t yet countersigned the agreement, the people said, and eventually opted for a private unitranche, a blend of junior and senior debt, of the same size. More than 10 lenders including Apollo, Jefferies and CVC took part in what became possibly the tightest-ever pricing for a European direct lending deal despite the market turmoil.

KKR decided to pay some of the traditional lenders a fee anyway because for about 10 days in early April, before private lenders stepped in, the banks were carrying that risk amid the tumult. Spokespeople for KKR, HSBC and Citi declined to comment. A representative for Jefferies didn’t immediately respond to requests for comment.

With undrawn loans now a possible bargaining chip for banks, speculation is rising over how soon they’ll come across a situation similar to Karo’s.  

One that’s being closely watched is the acquisition of Spanish waste management services business Urbaser. Private credit funds and banks are competing to underwrite a package that includes over €2 billion of drawn debt. At the same time, any buyout could require €1.5 billion or so of guarantee and revolving credit facilities, people with knowledge of the matter said earlier this month. 

“It is not surprising that banks are taking a longer-term view on maintaining and nurturing relationships in this market,” said Sabrina Fox of Fox Legal Training, a leveraged finance expert. “Even if that means short-term loss, there is a much higher potential for long-term gain.”

–With assistance from Rheaa Rao.

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