Are private debt funds getting fucked right now?
As the topic suggests - are PD funds getting screwed now as credits get stressed given they have less structural protection vs senior lenders? Also from anecdotal sources / deals I've heard it seems that even in default cases PD lenders and the market at large have no idea how Long covid will persist, which makes the path of resolution that much tougher to work out. Happy to hear thoughts.
Being in the space myself, very confused as to what you are saying when you say, "are PD funds getting screwed now as credits get stressed given they have less structural protection vs senior lenders"? Private debt firms can be senior lenders, unitranche lenders, and mezz lenders. There is no distinction between a private debt firm and a senior lender unless you are making a distinction between a credit firm and a bank.
Second, private credit firms are not get 'destroyed', depending on their underwriting standards their portfolio may be stressed, but it goes back to how stringent they are in underwriting credits. New deal activity has been at a standstill given M&A is relatively dead so new loan issuance's are at an all time low. Right now, all private credit firms are focusing on portfolio management and subsequent workouts / RX.
Thanks mate, to your points - I was referring to 2L / sub debt / mezz deals done. So if I understand your point around workouts correctly, firms aren't necessarily expecting impairment now given they believe sponsors will end up curing any breaches and / or injecting more equity?
At the end of the day its very dependent on your relationship with the Sponsor and how the Sponsor is valuing the portco and whether they care enough to support liquidity or just want to give up the keys. Sponsors have and will continue to provide equity cures through capital injections if they believe the business can get to the other side; however equity firms have often times requested lenders to share the burden through converting cash pay to PIK, covenant holidays, and the like. You will see many more defaults and RX's come Q2
Great stuff - interesting that the sequence of solutions you've suggested are equity cures with debt providers "sharing the burden". Have you seen instances where Sponsors are requesting for debt relief but not injection equity / demonstrating commitment by some means?
Not too much, but its not like lenders have any obligation to fund incremental debt. Some lenders consider just taking the keys if the Sponsor doesn't intend to support the business; a lot of private credit lenders are former PE folks so it wouldn't be the most difficult transition
Adding on to A2 reply above,
Yes we aren't getting destroyed, just much more stringent and stressed with some of our portco already asking RX/waiver of payments. Even more so we have a massive Aviation and MRO portfolio companies. We already have to turn down RX mandates from other companies since we are full on maintenance and capital rescues. We already lost one of our sponsor/LP and we are projected to be down around -20% for this year if the government decide to close down until August.
I think we would start getting absolutely destroyed if this continues to 2021, layoffs would be imminent by then.
Interesting indeed, although I'm sorry to hear about how the Covid situation has affected your portco. Are you based in Asia? mind if I PM you some questions?
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