Opportunistic Lending Interview
Title says it all. Got an interview coming up for a UMM fund in their opportunistic credit group. Focus would be on private credit opps. Firm was initially founded a distressed shop with this probably being its foray into middle market private lending. Think of this as a similar role to Ares/Golub opportunistic credit.
Have had prior experience in a private credit / direct lending role but want to venture further down the cap structure and/or into riskier investments. Don't have a background in restructuring.
Any resources / prior interview questions / case studies, etc. would be appreciated.
I'd think about some of the levers you would want to pull to juice returns as a special sits lender and what situations work best for what types of levers.
Potentially would also think about some of your 6x unitranche structures and structuring how you would add additional turns of leverage to the business if the company needed capital quickly.
Hey - thanks for the response. Given my unfamiliarity with these topics, any resource you'd recommend to get smart on these questions?
For example, for the second part, only things that come to mind are adding an additional tranche below the unitranche either as a Mezz or pref piece with a PIK payment option to preserve company cash flow, avoid dilution of equity if it's a sponsor-backed deal (and if non-sponsored, given there's no liquidation timeline in sight, protects you from holding onto the equity for a long time whereby you can't force the company to buy back your piece and/or there's no active management push to sell the company), and bump up cumulative returns with a junior piece. Ofc, this is all assuming that the EV doesn't break into the pf structure.
Any answers to the above questions would be appreciated as well (especially on the levers special sits lenders use to juice returns).
Thank you!
I disagree with this answer. If a 6x levered business is seeking new capital and the sponsor doesn't want to put up new $, then you should absolutely dilute them as much as you can, take board seats etc. If non-sponsored, you can solve your liquidation timeline problem by mandating the company to put themselves up for sale after a certain amount of time or when financial milestones are hit / missed. In reality if you are coming in behind a 6x debt stack as a pref then you are likely the fulcrum, or possibly even out of the money, so it doesn't make sense to put yourself in the position to have capped returns when you are effectively creating straight equity. My first thought would be to try and prime the existing lender either straight up or through a collateral carve out (consensual or not) and take some penny warrants for the trouble. All of these options sound aggressive but a good mindset to have when approaching a bloated cap stack where no one else wants to put up new $ is to just ask for whatever you want, and then if they say no hang around the hoop as the ship goes down because another bite at the apple will present itself.
Thank you for the comment. Do you mind expanding on what you mean by "priming" a lender and/or collateral carve-out? And/or a good resource to get smart on these terms / distressed initiatives? Clearly lacking some knowledge on this stuff. Thank you!
To prime is to insert your debt ahead of an existing piece of debt. Just because there is an existing piece of secured debt doesn't always mean you can't create a senior security with collateral priority. This can be accomplished by tapping debt capacity baskets in credit agreements or by getting a consent from the existing lending. A collateral carve out is to lend against only a specific set of collateral away from the whole. Lender A has $100 of debt collateralized by $200 of disparate assets and the Company needs another $25 of capital. You might come to an arrangement where you lend $25 against a "carved out" $50 of assets thereby reducing Lender A's collateral pool to $150. This can sometimes be a solution to a short term capital need without overly penalizing Lender A.
That's helpful. A few follow-up questions:
- On priming current lenders, wouldn't debt baskets generally be negotiated in the initial credit docs such that incurrence of additional liens / debt would need to be approved by the existing lender or they may have a right of first refusal? Assuming this is true, and assuming that the existing lender itself does not want to sink more cash in the company, why would the existing lender be ok with a new investor sliding above them in the cap stack? Why wouldn't the existing lender force the Company to raise more equity (public, private, or sponsor) and/or atleast raise cash through investments that are structurally subordinated?
- Similarly on the collateral carve-out: Using the same example, even if the existing lender's $100 of investment is covered by $200 of assets that have a reasonable path to liquidity/cash conversion, why would the existing lender let some of that collateral be carved out? Sure $150 is still enough to cover their investment, but still doesn't provide the safety net that $200 does. Only argument I can think of is that at the end of the day, all investors want the business to do well to clip their fees/coupons/returns, etc. But then brings me back to the same question: why wouldn't existing lender force someone to play below them in the cap structure?
Thank you for walking through this!
Sure, good questions.
In general, you're right that any lender would prefer new capital coming in beneath them. Loosely negotiated credit docs ("cov-lite") can be taken advantage of to jam existing lenders if there is only a simple debt incurrence test that must be satisfied for new money to come in or a test may not exist at all. Not always the case that new money must be consented to by the existing lender. You can force a company to raise new money, but that doesn't always mean new money will be there in the form you want - i.e., subordinated capital. In that case, you have to take what you can get. Sometimes you can fix the issue by giving the existing lender an amendment fee or some other improved term and they'll be happy. It is case by case. My point is still the same from above though that if new money is needed and no one wants to put it up, then you don't really have a choice and new money can get highly preferential terms. Especially if it is a capital solution for new liquidity, an existing lenders' option if they want to be difficult is to just throw the company into BK and enforce on assets. Not everyone wants to do that, especially banks, and it doesn't always solve your problem anyway. So at a certain point they need to come to the negotiating table. To your second point, someone might allow a collateral carve out because it solves a problem and they are willing to compromise their own LTV if they'll take a view of still being reasonably covered. Keep in mind that a lot of the above is based on a consensual arrangement coming together...it is possible, and happens, for new money to jam through priming debt on a non-consensual basis because loop holes in credit docs are discovered. I think at the end of the day the most important consideration is the point I made earlier that subordinated capital - mezz, preferrerd, equity, etc is not always available and it is entirely possible to make 15%+ on top of the cap structure, secured debt.
This isn't directed at you, but I've had some difficulty in the past with interviewing people from LevFin seats or more traditional direct lenders because it takes a while for them to imagine a cap structure as more of a sandbox and move away from "mgmt want this, etc".
Direct lending - opportunistic - above comments hit on most of the points, so not much more to add.
Browsing my database of deals (more so direct lending deals w/ a mix of storied credits, deals w/ warrants etc— less so “opportunistic”)…a few interesting structures and terms I see not already mentioned
1) RC commitment fee - 75 bps (1 time existing or initial lenders got 75, new lenders got 50). FYI 75 is like unheard of, almost disrespectful pricing. 50 bps is standard for DL deals.
2) prepayment premiums - heavier. Seeing some NC1 (w/ make whole), some NC2. Example - SmileDirectClub - NC1, 104, 103, 102, 101. L+750+3.25% PIK. Monthly reporting requirements were heavy - including KPIs.
200 bps ticking fee on DDTLB. Honestly amort - companies almost have a trademark amort in DL - I could guess the DL within 2-3 guys based on amort. Cerberus is an easy example - it’s a non-rounding % or weird % that u gotta calculate off to the side - which is also annoying.
Board observer rights, warrants all that stuff already mentioned. You’ll see pricing increase 100 bps if QOE Isn’t delivered by a date or there’s still material weakness.
Also love seeing GS Specialty lending deals - w financial covenants - not 1, not 2 (Lebron The Decision ref), but 5 financial covenants. “How many covs we got? Only 4? Let’s add in some bespoke one like this ___.” Also agree - see a lot of Capex covs structured that way. Seeing 50% carry FWD.
That’s all I got for now. Hit me up directly if u wanna discuss but I would say opportunistic isn’t necessarily my “niche”
I forgot to comment back on this. But certain terms I have seen / used have been:
- Heavy warrants;
- Higher PIK / Cashpay rates
- Deeeeep OID (we did a deal with an 80 OID).
- Minimum MoIC (1.4x+ range)
- Heavier call protection that mentioned above -> (109, 107). We put a term sheet out with 112.
Structures are also a bit bespoke as well:
- Combo 2L / Pref's behind unitranches;
- Sidecar facilities for acquisitions;
- Already mentioned above but loans against collateral stripped from the main box;
- Purchasing security ahead of you if trading at a stressed discount and converting into your junior box with an implied OID.
Yep agreed with all the above. We had a couple deals done with IRR catch ups, buyout rights over the senior at par+ (in situations where we are lending to a Holdco and there is a senior lender at the AssetCo, and other more vanilla stuff like cash sweeps, Warrant increases due to missing budget, and mandating 13-week cash flows for all deals.
Dude Majj12 OP you are an F’in machine. Diving the F in. This is how you prep folks - if you’re highly motivated, take notes. Hit me up, you should do some direct lending project work for me!
I like intellectually curious ppl that don’t just touch the wall, but run through it
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