Welcome to Debt Download, Goodwin's monthly newsletter covering what you need to know in the leveraged finance market. We know what the debt markets did this summer. Read on for all the plot twists during this busy month.
Note: Some of the links in this newsletter may redirect you to a subscription-only resource.
In the News
- The broadly syndicated loan (BSL) market in July showed gains in new-supply issue outside of refinancing, raising hopes of an M&A resurgence, though August crashed the party with a degree of volatility that quickly eclipsed those headlines. The average spread of single-B loans rose to S+380 (S+370/99.7 OID), from S+364 (S+355/99.7 OID) in June. As for price flex, 25 loans were tightened against four loosened, for a 6.3:1 ratio, well down from 19.5:1 in June—and the most lender-friendly result since November 2023. New-issue volume net of associated repayments was $15.3 billion. Breaking down usage generally, loan proceeds for M&A activity hit $33.7 billion in May through June 2024, with $16.0 billion in July alone, or 17.5% of volume, a 10-month high, compared with $8.8 billion in June. All non-refinancing issuance came to $23.8 billion for July, a healthy 28% of the total, representing the highest figure for such usage since January 2022—a positive sign for net new supply. Refinancing activity accounted for $10.7 billion, the lowest reading of the past 12 months. While this is a reversal of what had been a strong trend, we believe this reflects the fact that borrowers that were ready and able to refinance have already done so.
- The debt markets were then jolted by news of slowing economic growth and weak jobs numbers that upended hopes of a “soft landing,” pummeling both the equity and debt secondary markets. The Morningstar LSTA Loan Index dropped 0.55%, the steepest fall since March 2023, when the markets were hit by the Silicon Valley Bank collapse. Strong secondary BSL pricing had been driving the record-breaking repricing activity this year in the primary market, and primary markets suffered an immediate fright from the dip in secondaries. Several loan and bond deals were pulled from the market, triggering fears of an end to the “ summer debt boom.” But the debt markets quickly regained their footing and settled down, with issuances resuming and one portfolio manager at Polen Capital calling the impact of the sell-off in debt markets “ a big yawn.” Even so, while pricing activity resumed, the market volatility took the steam out of "risky deals, and more aggressive financings." Already, volatility has triggered a wave of deleveraging to address sudden margin calls, particularly bets on the yen “carry trade,” crypto and tech stocks. Goldman Sachs said July was one of the biggest deleveraging periods for its hedge fund clients in the past 10 years.
- Private lenders have found ever more novel ways to deploy
assets, in efforts to meet insatiable demand, to navigate this
quickly changing landscape and to compete against lenders in the
BSL market. Here is a brief summary of some of the strategies
we've seen recently:
- Private lenders are extending their vaunted flexibility beyond PIK and delayed-draw options to more creative approaches, such as the increasing use of penny warrants. While still uncommon, private lenders are more frequently receiving equity warrants, which are typically packaged with a junior debt component for lower middle markets borrowers and are realized upon an agreed exit event. In these deals, warrants make up a greater proportion of lenders' return, now making up 25% to 30% of overall return with yield (whether cash or PIK) making up the rest, according to LCD.
- Golub is reported by Bloomberg Law to have established a desk to execute secondary trades in private credit (a sector in which debt is more typically held until maturity). Golub reportedly traded $1 billion in private secondary debt in the first half of the year.
- Other private lenders, such as Fortress, KKR and Carlyle, have muscled into riskier consumer debt, such as credit card and “buy now pay later” (BNPL) assets, also in an effort to deploy dry powder. These funds have bought up consumer loans (e.g., Castlelake's $1 billion purchase from Pagaya Technologies) and dental loans (Fortress's €750 million buy), and have formed new funds specifically geared toward BNPL (KKR).
- Lenders are also looking to an uncommon source for funding: retail investors. There is room to grow in this sector, which comprised less than 20% of private debt assets under management at the middle of 2023, the latest data available, according to Bloomberg Law. This approach “puts pressure on funds to deploy [dry powder] as soon as possible,” given the shorter timeframe built into internal rates of return calculations in the retail market. HPS Investment is managing this dynamic by limiting inflows to one of its funds, which allows for “flexibility to walk away from deals.” Apollo, BlackRock and Goldman Sachs are targeting the US with this strategy, while Goldman Sachs and Carlyle are looking at Europe.
- Goldman Sachs is tapping a deeper pool of potential lenders by committing to asset-backed loans alongside its asset-management clients (i.e., insurance companies), which are attracted to the safe investments. Goldman Sachs is looking to bring its private-credit assets under management to $500 billion in the next five years, which would double today's figure.
- Quick roundup of recent new direct lender debt funds and
related news:
- Ares closes record $34B private credit fund (Leveraged Commentary & Data)
- Churchill launches private credit fund with USD 210m (Debtwire)
- Blue Owl raises USD 400m in 12 months for direct lending fund (Debtwire)
- Neuberger raises more than USD 2.7bn for fifth private credit fund (Debtwire)
- Vector launches special situations private credit fund (Debtwire)
- Janus Henderson extends private credit foray with Victory Park Capital purchase (Leveraged Commentary & Data)
- TPG Twin Brook closes fifth direct lending fund with $3.9 bn in commitments (Private Debt Investor)
- The volatility spike “ puts a spotlight on the market for debt financing maneuvers that help some lenders and hurt others”— in other words, lender-on-lender violence. Advisory firms specializing in restructuring, such as Moelis, Houlihan Lokey, Lazard and Evercore, have enjoyed a “ boom in restructuring,” specifically taking on “complex and stressed financing situations.” Private lenders meanwhile are preparing for a renewed round of “ proactive maturity management,” with several credit funds, including those managed by Oaktree Capital, Pimco, Sona Asset Management, King Street Capital and Beach Point Capital, “busily building a wall of money to help secure their own lending positions in emerging conflicts—and to profit from the wider mayhem.” Looser documentation over the past few years have squeezed returns in distressed situations; lenders that could have expected to recover 70% to 80% saw their returns drop to near zero, as liability management exercises (LMEs) came to the fore. And many borrowers, which frequently utilize LMEs to keep out of bankruptcy court, wound up there anyway. In fact, an AlixPartners survey of restructuring and turnaround professionals indicated that these exercises are generally inadequate to “enact an operational overhaul.” By emphasizing speed, LMEs have not provided enough time for companies to resolve the issues leading to a workout, according to a majority of respondents, with only 3% saying that LMEs offer a “permanent fix.” To address these challenges, the abovementioned funds are raising capital both to defend their own positions and to engage in “ gatecrash restructuring.”
- That said, creditor-on-creditor violence may not be so violent going forward. One legal expert has observed that LMEs have become more collaborative between competing classes of lenders, with Thrasio (an Amazon sales aggregator) held up as an example: “they offered everyone a seat at the table, and even smaller lenders participated pro rata in the Debtor in Possession loan.” Cooperation agreements may be a primary tool in achieving “a creditor-friendly outcome.” Lenders are increasingly uniting behind co-op agreements, with the hope of avoiding “getting run over” by an LME. Finally, tighter documentation itself can help bring the peace among lenders. For example, Blackstone recently tightened up its form documents to close any loopholes like those found in the Pluralsight LME. (See the Goodwin Insights below for a deeper dive into the Pluralsight transaction, a rare sighting of an LME in the private debt space.)
Goodwin Insights – Pluralsight Change of Control Transaction – The Tip of the Private Credit Iceberg?
In June, Debt Download looked at the liability management exercise (LME) conducted by Pluralsight, a technology learning platform, and its sponsor, Vista Equity Partners. In this Goodwin Alert, Goodwin partners Michael H. Goldstein, Howard S. Steel and Alexander J. Nicas break down each step of the transaction and consider whether this signals a sea change for private credit–backed companies or an aberration.
In Case You Missed It – Check out these recent Goodwin publications: EU AI Act: Key Points for Financial Services Businesses; Federal Reserve Issues Final Joint Guidance for Large Bank Resolution Plans; FDIC Proposes Overhaul to Brokered Deposit Classification Rules; Significant Impact to Banking as a Service (BaaS) Industry; The Chevron Doctrine Is Dead. What Are the Implications for Business?; CFPB Files Suit Against “Rent-to-Own” Business Alleging Illegal Lending Practices; Loan Origination Under AIFMD2: A Guide
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.