Starting to See Material Weakness?
For those in Private Credit, curious as to what you're seeing in the portfolio.
- Any specific sector weakness?
- Alarming amount of companies generating negative "True Cash Flow" (Cash from Ops - Capex - Mandatory Debt Repay)?
- Companies experiencing strong Q1s with a significant drop-off in Q2/Q3?
- Companies able to keep EBITDA steady despite volume decreases due to price increases - how much pricing power will these companies have going into next year? Expect volumes will continue to decline in a lot of these businesses that are experiencing this now
- How many "Recession Resistant" companies have you underwrote in the last few years that are indeed proving to be more cyclical than the sell-side/buyer made it out to be?
For myself, a lot of deals originated in the 2021 era with ~6x+ Leverage are really starting to see the pressure on true cash flow (not surprising). Starting to see material weakness in certain sectors of chemicals, heard certain segments of HC are having issues as well. Industrials seem to be showing weakness, but that's such a broad category its hard to really drill down without getting too specific.
I would not want to be the Equity that paid an inflated multiple, with PortCo's that have negative cash flow + likely heading into a downturn of some sorts.... really feel like PE is going to have a day of reckoning. For those private credit lenders that can get creative and PIK interest... that might buy time, but all that is doing is diluting equity returns... oh and don't get me started on these NAV lines - wtf?
Based on the most helpful WSO content, it seems like there are indeed some signs of material weakness in certain sectors. Here's what I've gathered:
Specific Sector Weakness: Some sectors, such as chemicals and certain segments of healthcare, are showing signs of weakness. Industrials also seem to be showing some weakness, but it's a broad category and hard to pinpoint without more specifics.
True Cash Flow: Many deals originated in the 2021 era with ~6x+ Leverage are starting to feel the pressure on true cash flow. This isn't surprising given the economic climate and the high leverage.
EBITDA and Pricing Power: Some companies have been able to keep EBITDA steady despite volume decreases due to price increases. However, there are concerns about how much pricing power these companies will have going into next year, especially if volumes continue to decline.
Recession Resistance: There are questions about how many "Recession Resistant" companies underwritten in the last few years are proving to be more cyclical than initially thought.
Private Equity Concerns: There's a feeling that private equity might be heading for a day of reckoning, especially for those that paid inflated multiples for companies with negative cash flow that are likely heading into a downturn.
Remember, these are just observations and trends based on the WSO dataset. The actual situation can vary greatly depending on a multitude of factors.
Sources: What is your opinion where we are in the cycle and how is your firm preparing for the next 12-18 months?, Distressed Investing: This Time It's Different, Looming Liquidity Crisis?, https://www.wallstreetoasis.com/forum/credit/private-credit-will-it-hold-up?customgpt=1
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