Ropes & Gray attended the SuperReturn International conference in Berlin this month, which attracted over 5,000 decision makers from private capital who came together to share their outlook for 2024 and beyond. Here are some important takeaways drawn from recurring discussions that took place at the Private Debt Summit, relating to contemporary challenges and opportunities for private credit firms in the current markets.
- The Significance of Financial Covenants: In an era of high interest rates, the importance of robust financial covenants cannot be overstated. This allows lenders to intervene early and proactively in case of potential issues. It is vital that the financial definitions used in these covenants are meaningful and provide a clear understanding of the financial health of the borrower.
- The Power of Information: For private credit firms, having access to comprehensive and accurate information is key. This information enables them to make informed decisions, manage their investments effectively, and identify potential risks and opportunities.
- The Challenge of Debt Maturities: The interest rate hikes pose a significant challenge for the approximately 26,000 companies that private equity firms have invested in prior to the hikes. With $2.3 trillion of debt maturing in the next 3.5 years, much of which was raised in a zero-rate environment, lenders need to be cautious when analysing amendment requests. The fact that many of these companies are no longer generating free cash flow, after deducting capex, adds another layer of complexity to the situation.
- The Need for Expert Personnel: Private credit firms must ensure they have the right personnel to conduct a holistic credit analysis. When called upon, these experts should be able to evaluate the entire credit situation, which is particularly important if they are to assume control.
- The Opportunity of Clubbed Deals: Clubbed deals present an opportunity for private credit firms to secure better terms. By dividing the negotiation process among multiple lenders, each can insist on key points that benefit the entire group, leading to more favourable terms overall.
- Relationships Still Matter: While we have seen more aggressive lender tactics in the broader syndicated market, the sponsor – lender relationship is still crucial and, on the whole, the private credit market has done a better job of using these relationships to protect from liability management transactions.
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