Most people I know are staying far away from instruments further down the cap structure in leveraged markets, and markets have generally been more risk off and attracted to quality recently. I was curious what people focused on mezz and unsecured are doing and thinking. What's your plan for the close of the cycle? Are you having to make a lot of concessions in order to deploy capital right now? Are you banking heavily on being mostly in a safer sector or something else? Thanks in advance.
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Pricing of mezz has decreased steadily over the last couple years as a result of a few factors such as the large influx of new lenders driving competition and the unitranche product becoming more prevalent. The benefit of having to deal with one lender in a unitranche structure vs a club of lenders especially when the credit goes south goes a long way. Given the current economic conditions lenders are also more hesitant of being deeper in the capital structure, especially because pricing doesn’t justify the risk. Another concern within the private credit market is the deterioration of covenants such that cov-lite loans especially in the middle market are now becoming more of the norm than an anomaly. You can see this slightly dropping down to the middle market and lower middle market. Mezz lenders do not want be under a cov-lite loan especially given the ridiculous addbacks that lenders are levering off of.
Thanks! Could you explain what the addbacks are?
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