Again, previous content didn't really generate much traction so maybe I am posting this in the wrong forum or I am completely wrong. I just think it would be really interesting to hear PE professionals take on the state of the leveraged lending market (recently heard that a big name private credit player offered a 8.5x uni.... that's right... and 8.5x uni).
There was an article on Zero Hedge that was talking about the state of the market and how loose credit agreements, high leverage, and weak underwriting may lead to a particularly bad level of defaults in the next recession. I am on the private credit side so it really seems like Sponsors are essentially term makers and not takers as private credit shops compete to win deals. Again, don't have much experience but it would be really interesting to hear other people's perspectives on the state of the private equity / private credit market.
See my previous discussions here: https://www.wallstreetoasis.com/forums/triangle-c…
Anyone?
What does 8.5x uni mean and why is that remarkable?
A unitranche financing is a hybrid loan structure that combines senior debt and subordinated debt into one amount bearing a blended interest rate that would usually fall between the rate for the two types of debt. I should have mentioned its EV multiple (~mid teens) so you could get a better idea of the leverage. Basically, unitranche deals are supposed to be for solid credit companies and if I do recall, this one was not. It just adds more risk for the senior credit providers.
If anything, the big takeaway to me is that companies are being overleverd and given lower prices as a way to win deals with Sponsors. I just don't know what will happen years from now when the market takes a left turn.
Unitranche financing are not deals only "for solid credit companies." A lot of unitranche lending is to middle-market businesses that can't get straight bank debt and it is nice to negotiate with just one party.
If they lent at 8.5x, which does seem high at face, but the company is worth mid-teens then it's probably a pretty decent business. At 15.0x there is still 6.5x of equity value behind it. Can't really give too insightful of an opinion without more info, but my 2 cents.
Appreciate it, again would love contrarian opinions as I am still fairly new to the industry. Just don't want to say too much about the company obviously.
A lot of what is ignored when talking about higher-than-typical leverage levels (as a multiple of EBITDA) is that nowadays a lot of credit is going to low-capex businesses which generate more FCF as a % of EBITDA relative to older economy business. I'm talking about things like enterprise software which are huge in credit markets now, but were less so in previous credit cycles. Just something to think about before thinking things are so scary.
This is an interesting point. I was just talking with a buddy in LevFin who worked on the financing for KKR-BMC and I was absolutely shocked at level of leverage they were getting away with. You have to wonder what has encouraged lenders to be more comfortable with these leverage levels on "asset-light" businesses. Vista Equity Partners, which did alot of early software LBO's, contended that the contracts between these companies and their customers were almost as solid as hard assets because without the software, the customer's business couldn't function. While this may be true for some population of software companies, I don't think it justifies the rampant leverage that exists today.
Banks are making money on syndication fees (and aggressively competing to do so). Debt funds are making money as the economy is good and companies are making their interest payments. Sponsors are making money with recaps and exits. Management is making money because the Sponsors are making money. Just like the financial crises, when everyone is making money no one wants to stop the party.
Lol, "YUUUGE" switching costs! To your point though, I bet you would be surprised to see the amount of cov-light deals that are coming through the pipeline in MM lending. You would also be surprised to see how many debt funds have capital market arms to syndicate out deals to investors. Look at Ares direct lending for example, they are able to syndicate paper off of their BS to institutions.
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