Private credit funds are starting to confront the downside of the easy-money era of the past decade: They’re increasingly taking control of businesses that fall foul of loan agreements.
(Bloomberg) — Private credit funds are starting to confront the downside of the easy-money era of the past decade: They’re increasingly taking control of businesses that fall foul of loan agreements.
Direct lending units at European firms such as Arcmont Asset Management, Ardian SAS and Pemberton Asset Management are set to take the keys of companies they lent money to, as the surge in interest rates and a worsening economic climate pile pressure on businesses in the US and Europe.
In the past few months, Arcmont began the process of taking over German cocktail chain Sausalitos, while Pemberton became the owner of UK ready-meal business Oscar Mayer, regulatory filings show. Also, Ardian’s credit unit is in the process of taking over Emvia, a nursing home operator in Germany.
Private credit grew into a $1.5 trillion behemoth over the past decade in a great environment for riskier borrowers to sell debt at historically low rates. As buyout firms snapped up assets, they needed plenty of financing that banks weren’t always willing or able to provide. Now, some borrowers are struggling to keep up with interest payments on their loans, which ratchet higher along with market rates.
“That is really a sign of the times more than a change in attitude of private credit funds,” said Ranesh Ramanathan, who co-leads the special situations and private credit practice at law firm Akin Gump Strauss Hauer & Feld LLP. “For the last 12 years or so, there has been so much cheap money in the market that refinancings were largely available and few defaults were seen, other than where the sponsor threw in the keys.”
Read more: Private Credit’s Quiet, Unstoppable Rise Comes With Unknown Risk
Debt providers Alcentra Asset Management Ltd., Goldman Sachs Asset Management and Partners Group Holding AG are poised to take a majority stake in Unzer, an embattled payments firm owned by KKR & Co., Bloomberg News reported last week.
Preparing for Defaults
Private credit funds including Blackstone Inc. and HPS Investment Partners have been building up their expertise in restructurings and workouts, in anticipation of rising stress.
A report by law firm Proskauer Rose in April showed that 114 out of 150 private credit executives surveyed expected defaults to rise in their portfolios in the next year, the highest level in the past five years.
Ultimately, some of these debt-for-equity swaps may turn out to be profitable for direct lending funds. As a company’s debt is converted into equity, it’s left in a better financial condition with a much-reduced interest burden. That can allow the new owners to sell it on for a price that provides a higher return than the loan would have.
They also don’t have to be hostile. Oftentimes, private equity owners would prefer to cut their losses than throw more money at an underperforming business.
“Given M&A is slow and concerns over a prolonged difficult macro environment, sponsors are looking for a strong rationale for providing further liquidity,” said Josine Massop, a senior director in restructuring and corporate finance at FTI Consulting. “It might make more sense for sponsors to be selective and make follow-on investments elsewhere and hand over the keys to the lenders.”
Still, lenders go into loans with the expectation of getting interest payments and the return of their principal, not to become business owners.
“The upside is potentially higher returns if they can turn the business around, but this is generally not the objective of private credit lenders – they would prefer to just get paid what they are owed and move on,” said Ramanathan.
Deals
- KKR, HPS Investment Partners, and Nomura have provided a S$265 million unitranche loan to The Learning Lab to refinance existing debt
- Finastra Group Holdings Ltd. is seeing more than enough demand for its $4.8 billion loan that is part of a refinancing package it has been trying to put together for months
- Financial technology consumer lender Oportun Financial Corp. agreed to sell $700 million in personal loans to private firms Castlelake LP and Neuberger Berman Group
- Ares Management Corp. is in talks to invest in Chelsea FC, the English Premier League football club seeking a capital injection
- CoreWeave, the provider of cloud solutions and related computer-intensive services, received $2.3 billion in debt financing for its planned expansion in artificial intelligence from a group led by Magnetar Capital and Blackstone Tactical Opportunities
Track the largest deals in the industry with our Private Credit Loan Monitor.
Fundraising
- PGIM Private Capital, the investment management business of insurance giant Prudential Financial Inc., is targeting $3 billion for its second direct lending fund
- UBS O’Connor, the independent investment business within UBS Asset Management, plans to raise up to $2 billion for its third opportunistic private credit fund
BDC Earnings
- Blackstone BDC’s Total Investment Fair Value Hits Seven-Qtr Low
- KKR BDC Sold $500 Million of Loans Expecting More M&A
Job Moves
- Harinder Hundle spent about a decade advising the world’s rich at global banks including JPMorgan Chase & Co., but now he’s striking out on his own
- Cresset has hired Bradley Schneider as managing director and head of private credit.
- Nimrod Wei left his post as managing director at AB CarVal Investors and is looking to start a new fund in excess of $300 million to focus on private lending to Asian companies as well as secondary-market trading in stressed and distressed corporate loans
- Asia-based asset manager Hillhouse hired Srinivasulu Yanamandra for its private credit business
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