The $1.7 trillion private credit industry is set on transforming itself into the world’s new banks, and it’s putting on display an ever greater tolerance for the risks of lending to indebted companies.
Lately, that’s meant coming up with ways to stabilize companies wobbling under a third year of elevated interest rates. For some borrowers, the beginning of lower Federal Reserve interest rates, widely expected to start in September, may not come soon enough. Squeezed borrowers are finding it harder to engage with public markets, and that’s left them looking for stop-gap measures from private lenders.
“An absence of rate cuts from the Fed is starting to impact businesses who knew they would have to refinance and were hoping rate cuts would be a tail wind at this point,” said Tim Donahue, global head of capital solutions at Lazard. “Public credit investors are generally hanging back when it comes to more storied credits.”
Private credit funds are reaching further for deals as the leveraged buyouts that are their bread and butter stay scarce and the interest margins they can expect to collect on the biggest deals breach lows. Providing stop-gap funding is one way private lenders can keep up the stellar returns they’ve grown accustomed to.
Take Health Catalyst, a data and analytics provider to the healthcare industry. It received a $225 million credit facility from Silver Point Finance, which included a $100 million delayed draw term loan.
Carestream Dental Inc. recently approached private lenders to try to raise new debt as part of an out-of-court restructuring proposal, Bloomberg reported. Gopher Resource, which has been mired in litigation liabilities and other problems, also reached out to direct lenders. Officials at Carestream Dental and Gopher weren’t available to provide an update on their financing plans.
Delayed-draw arrangements give borrowers access to the full amount of a loan when the deal closes, with the option to borrow at a later date.
Such borrow-now, pay-later deals are proliferating. Payment-in-kind, or PIK debt, allow borrowers to pay interest with more debt. One controversial practice cropping up on more deals involves a “synthetic PIK,” which lets companies defer interest payments without calling the loan PIK.
“Big cash payments don’t give you an opportunity to breathe,” said David Hayes, a partner at Reed Smith LLP.
To be sure, not every deal is likely to get signed. When they’ve encountered companies with little hope of a turnaround, private credit funds have passed.
For instance, Chicken Soup for the Soul Entertainment Inc., the purveyor of self-help books and owner of DVD rental firm Redbox Entertainment Inc., sought preferred equity and a debt raise, among other options. The company wound up filing for bankruptcy last month.
Short-term cures may not help a company faced with deep-rooted performance issues, said Eric Koza, partner and managing director and Americas co-head of turnaround and restructuring at AlixPartners. His firm targets private credit loans that have underperformed for quick, quiet restructurings.
Lenders are also on their guard after a maneuver by Vista Equity Partners-backed tech learning platform Pluralsight Inc. to shift assets away from its creditors. Some have closed loopholes in recent deals.
“Those protections are essential in deals like these,” Koza said.
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