The Lead Left: Recent Episodes
The Lead Left
This month, we have Jack Ablin, Chief Investment Officer and founding partner at Cresset Capital, a top fractional family office serving high net worth individuals and families. Jack discusses his extensive investment background dating back to the 1980s, highlighting how his strategy has evolved towards asset allocation.
Jack shares insights into the current macroeconomic landscape, particularly the shift in the bond market's competitiveness with equities and its implications for investors. He explores the attractiveness of private credit as an asset class, noting its potential as a hedge in a higher-for-longer interest rate environment. He shares his perspective on navigating private markets, advocating for a focus on middle-market opportunities and economically insensitive sectors.
This month our guest is Ron Kahn, Managing Director at Lincoln International and head of their valuations practice.
Ron sheds light on the current market dynamics, highlighting the robust performance of private companies despite lackluster M&A activity. The podcast explores the current economic climate, noting positive indicators like EBITDA growth and expectations of Fed rate cuts.
Throughout the conversation, Ron and Randy emphasize the resilience of private capital and predicting continued strength despite geopolitical uncertainties and upcoming elections. We also cover topics such as Lincoln private market index, financing costs, and the outlook for private capital and deal-making in the coming years.
This month our guest is Ed Goldstein, Partner, CIO of Coller Credit Secondaries, a leading investor in the secondary market for private assets.
In the wake of the global financial crisis, the private credit landscape experienced a seismic shift. As the secondary market gained traction, it began to offer liquidity solutions for investors in the private credit space. Investors, motivated by reasons such as underperformance, regulatory concerns, liquidity needs, stress, and opportunistic selling, started to explore this emerging avenue for portfolio management.
The discussion shifts to credit secondaries being more of an LP market, investing for upside potential, and the necessity of diversified portfolios to mitigate risk. In essence, the private credit market, though relatively young, is showing signs of maturation and paving the way for a future characterized by specialization, strategic partnerships, and a more developed secondary market.
In this week's episode, we are honored to welcome the renowned economist, Dr. Mickey Levy. As a visiting scholar at the Hoover Institution at Stanford University and a respected member of the Shadow Open Market Committee, Dr. Levy brings a wealth of knowledge and insight.
Join us as we delve into a range of critical economic topics with Dr. Levy. Our discussion encompasses the resilience and recent slowdown of the U.S. economy, the ongoing concerns surrounding inflation, and the Federal Reserve's interest rate policy. We also examine the current state of interest rates, including both short-term rates and bond yields, and discuss the implications of persistent budget deficits and escalating national debt. Concluding our conversation, Dr. Levy shares his expert assessment of the long-term outlook for the U.S. economy.
This week our guest is Van Hesser, chief strategist at KBRA, a credit rating analysis agency. Van is also the host of his own insightful podcast, "Three Things in Credit," which I highly recommend.
In this episode, we dive into the current economic landscape, explore the concepts of economic soft landings, no landings, and where we currently stand. We also discuss the aftermath of the banking crisis earlier this year, the question of systemic risk and private capital, and how to think about the default cycle – all essential considerations for private capital investors in the coming months.
We are thrilled to have Steve Segal as our first guest on the podcast. Steve Segal, a former Executive-in-Residence and Lecturer at Boston University’s Questrom School of Business. He developed and taught a graduate level course in private equity and leverage buyouts.
Steve was a co-founding partner of J.W. Childs, investing in middle-market growth companies, primarily in the consumer products, health care services and specialty retail sectors. During his tenure the firm completed more than 40 transactions with a total transaction value in excess of $11 billion.
Today, Steve is primarily a private investor, frequently collaborating with others on early stage ventures.
Now we come to the G in ESG. The governance link to environmental and social goals was cemented by the sub-prime debacle in 2009. Corporate malfeasance and lack of transparency propelled the need to identify future responsible ESG parties and enforcement...
As with climate change, diversity, equity and inclusion, with its goals of broad representation, fair pay and equal opportunity have become the lens through which investors are judging both managers’ investment selections and their internal DEI efforts...
Despite the politics of #climatechange, the burden of scientific evidence and rise in extreme weather events has compelled global policy makers to largely unite their efforts towards decarbonization...
Today’s #ESG river had many tributaries. From Mosaic law in 1500 BC and the Koran, to 18th century England, to the 20th century’s socially responsible investing, or SRI, all have joined doing business with doing good...
Last week we took our eight-year daughter to the library to stock up on books from her reading list. (The “Ready, Freddy!” series, in case you’re curious.) On the way out, a mother and her two young sons preceded us. The boys ran into the automatic revolving door. “No,” she said. “Come this way,” opening the swinging door...
Investors are settling into the view that economic effects of the war in #Ukraine will be more local than widespread. As the head of equities for a top European asset manager said, “You can draw a correlation map between proximity to the conflict and market impact.”...
It was almost a clean getaway. Two years since it emerged, Covid was crumbling. Vaccinations and infection immunity were finally having an effect. Hawaii became the last state to announce an end to indoor masking...
Increased focus on #ESG has mirrored the rise of private credit as an established asset class. This may not be a coincidence. The examination of environmental, social and governance factors as part of risk management has a long history in private credit given its illiquid nature...
Once considered a novel concept, the #unitranche – a one-stop senior secured financing melding senior and subordinated tranches into one – has captured the attention of private equity sponsors and lenders alike. Unitranche structures accounted for a remarkable 36% of middle market LBO financings in 2021, up from 10% in 2016...
From loan issuance, to LBO and M&A activity, to record CLO volume, 2021 was an unprecedented year in many forms. Coming off that record-breaking activity, we consider what lies ahead in 2022. In December 2021, our content partner S&P / LCD surveyed buy-side, sell-side and advisory professionals to gauge sentiment for the year ahead...
Historically, #covenant-lite was not a topic for much conversation in the middle market, as these loans were seen mostly in the broadly syndicated market. However, as the market has evolved, competition has intensified and lines have blurred between public and private credit. Cov-lite has increasingly gained share among smaller, unrated loans. What prompted this change? We observed the following dynamics...
We caught up recently with our chief investment strategist at Nuveen, Brian Nick for a conversation on markets and the economy:
“4Q was the best quarter of 2021 from a GDP perspective,” he told us. “Last year’s growth was 5.5%, best since 1984. Even half that rate in 2022 would still be above trend. But the hairpin turn by the Fed was remarkable. We went from one possible hike to 4 or 5 hikes today!
“Everything’s selling off in unison with nowhere to hide. Markets are adjusting to a more hawkish Fed, and a different set of winners and losers than we saw last year...
For private capital investors, the recent spate of market volatility is another opportunity to show strength relative to public asset classes.
The threat of higher #interestrates and spiking #inflation sent equity indices on a roller coaster ride. But loan buyers looked at this same data set and voted with their feet.
Last week another $2 billion flowed into retail funds, bringing inflows to almost $7 billion for 2022. Assets in these funds total $93.6 billion, double the level from only a year ago. In contrast, $13 billion flowed out of retail high-yield bond funds...
Last week we held our first “Lead Left Presents” webinar. 500 attendees heard four top middle-market #investment bankers discussing what happened in the M&A market in 2021, and what’s to come for the year ahead.
From a sector perspective, industrials were challenged in 2020, then bounced back sharply last year. Backlogs were “very strong” going into this year. #Covid highlighted increased labor costs and motivated businesses to ramp up in areas such as automation, water filtration, and air purification.
Covid “spiked” growth in some areas, but which ones will fall to earth and which are sustainable? Technology and software are “eating the world” by creating...
Over five hundred registrants tuned in last week for our “Lead Left Presents” 2022 M&A Outlook webinar. Our four panelists crammed in a ton of great content into 60 minutes. Here are a few highlights.
Last year was an “acceleration” of what we saw in 4Q 2020. Not just in sheer volume, but across a variety of sectors. Some slowdown in new deal launches occurred at the end of 2021, thanks to record deal closings.
The Fed’s massive injection of capital boosted equities and “brought courage” to private capital investors. Cash on corporate balance sheets and #PE dry powder fueled M&A growth. A supply/demand imbalance of capital outweighing #investment opportunities is expected to continue...
We’re kicking off the new year next week with our first “Lead Left Presents” webinar. Four top middle market investment bankers will be talking about the deal market, what happened last year, and what’s to come for 2022.
What’s motivating buyers and sellers? How did Covid impact processes and outcomes? How is extreme liquidity affecting the competitive landscape?
We’ll also look at sector behavior. Early in the pandemic you couldn’t give away cyclicals, retail, and travel and leisure. Today, as you’ll hear, everything is selling, and at high multiples.
How have different industries fared and how do bankers think about valuations? What’s the latest view of Covid adjustments to Ebitda? Are supply-chain issues putting a dent in growth and price expectations?
As we wrap up our special series on the 2022 private credit outlook, we turn our attention to #ESG. As our Chart of the Week highlights ESG is a fundamental concern of investors. How impactful it will be on manager behavior will depend on regulation and client demand.
ESG in some form has been around for centuries. From Mosaic law dating back to 1500 BC, to Henry VIII’s legalization of lending, to 18th century England and the Methodist movement, right up to the 20th century’s “socially responsible investing,” practices were rooted in screening out business activities misaligned with stakeholder values.
Today climate change, diversity, equity and inclusion, and corporate integrity, are the lens through which investors are assessing managers’ ability to deal with associated risks and opportunities for every investment...
Inflation and interest rates are linked but not always in straightforward ways. Fear of higher prices can drive rates up, while markets may ignore actual inflation having anticipated it.
Recent data has certainly created alarming headlines. Last Friday’s CPI report showed November’s consumer prices up 6.8% versus a year ago. Not since 1982 (when Joe Montana’s 49ers beat the Bengals in Super Bowl XVI) has that number been so high.
But as one analyst put it, “It was a high inflation print that was already expected and should have been priced into the market.” Offsetting inflationary worries are #Omicron’s impact on growth and the Fed’s decision to taper faster in front of potentially rate hikes...
In April 2015 we introduced the concept of the “cargo-pants strategy.” For direct lenders to compete against banks for leveraged loans, they needed to hold larger commitments.
So managers raised #CLOs, separate managed accounts, commingled funds, and #BDCs to create loan storage pockets. They could then allocate large commitments across vehicles without any one holding an outsized position.
As pockets were added, hold sizes grew. At the same time, the development of the #unitranche has given managers a competitive instrument to take share from loan arranging (not loan holding) banks.
At recent private credit conferences we’ve been asked how managers think about portfolio construction. Kind of depends on your experience over the past twenty-two months.
As one private equity partner told us, “we had a base case and a down-side case, but we didn’t have a no-revenue case.” Consumer-facing sectors had a rough time early on, particularly small retailers. B2B managed better, and in some cases, thrived.
Today the Omicron variant threatens to reverse growth scenarios and capital markets globally. Too early to tell whether this strain will be worse than Delta, or like Mu, disappear without a ripple...
Thanksgiving week in the US capital markets is always a mixed blessing. Wonderful for families and friends, celebration and gratitude. But smack in the crazy year-end rush. Everyone juggling deals and parties – and running on fumes. Six weeks before it starts all over again.
What will 2020 deal activity look like? Hard to beat 2021. As our friends at S&P LCD noted last week, high-yield bond and leveraged loan issuance set a new annual high of $1 trillion. And as our Chart of the Week depicts, combined syndicated and direct loans set a record $228 billion, topping 2007’s BSL-only mark...
As investment managers run through the tape towards an incredibly productive 2021, many are asking what will the new year bring?
No one could have foreseen a year ago vaccine success, or the 25% equities run-up. But we have have seen remarkable private credit performance over the past 24 months, so let’s highlight some key themes for the next twelve.
Activity levels. 2021 was characterized by the unleashing of pent-up private credit demand from issuers and investors. A lot was attributable to the virtues of the asset class highlighted by Covid: relative yield, less correlation and lower defaults. Will these benefits weaken from competitive pressures?
Our friends at William Blair ended their 3Q survey with issues most impacting leveraged loans through year-end. Here are a few:
Supply/demand equilibrium. Which comes first, supply or demand? Retail cash inflows and CLO capacity largely drive liquid loan demand. With private credit, it’s all about manager dry powder. There’s plenty of that.
But as we’re experiencing this quarter, deal flow is swamping investment teams’ band-width. Managers can thus afford to pick and choose, which means terms should lean more investor-friendly...
Having moderated three private credit panels in the past ten days, a recurring theme we’ve heard is the record level of deal volume. What’s driving this unprecedented activity?
In its recently published 3Q survey, William Blair reported $155 billion of institutional loans, nearly the highest number they’ve recorded. $92 billion was dedicated to M&A transactions.
Covid tailwinds are boosting companies to historic highs on revenues and Ebitda, encouraging owners to cash out at relative valuation peaks.
We reported (in person!) this week from the SuperReturn Private Credit conference in Chicago, an event that always attracts top-shelf credit investors and managers.
In a keynote interview with economist and former Federal Reserve governor, Randall Kroszner, we explored the contrast between two US economies: Covid-challenged, like restaurants, that are still in a recession, and Covid-assisted, like technology, that’s on a hiring tear. How can one monetary policy cover both?
Dr. Kroszner agreed this is a fundamental challenge. He also cited a study in which differing state incentives in the Sioux City region resulted in the same employment outcomes...
News reached us recently of a young walrus that had wandered south from his Arctic range in search of ice floes. Landing in Ireland, Wally began boarding luxury yachts. The property damage turned the whiskered wayfarer from “visiting celebrity to public enemy number one.”
It all worked out, though, when a marine biologist enticed the walrus onto a pontoon, which was hauled out of the harbor. Wally was last seen frolicking off the coast of Iceland. “He avoided sinking any boats while he was there,” one rescuer happily reported.
In the world of low rates and an uncertain economy [Chart of the Week], credit investors are similarly tempted off their usual hunting grounds. As Nuveen’s Brian Nick highlighted recently there is a “lack of clear and consistent signals about the trajectory of the global economy and public policy.”...
Of the many unanticipated consequences of Covid, one catching our eye was the recent NYT headline: “Birds Thrived During Lockdowns.” Seems that while we were stuck at home last spring, our feathered friends were out partying.
Urban areas, otherwise crowding out some species, saw hummingbirds and bald eagles return at 14 times pre-pandemic levels. “I am shocked at the fact we saw so many changes in bird behavior,” a Canadian conservation biologist reported. Pigeon populations were unchanged.
Leverage finance has experienced similar post-Covid alterations of behavior. This week the broadly syndicated market set a record for annual issuance - $505 billion, according to S&P LCD. With the bulk of the fourth quarter to go, 2021 will easily surpass 2017’s record $503 billion...
Last fall, the Harvard Business Review examined Covid’s impact on supply chains. The pandemic, they wrote, “exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere,”
The study also presciently identified “the growing electronics content in modern vehicles” as a potential bottleneck. Today we are witnessing how the shortage of semiconductor chips is hampering auto production.
Moving production in-house and increasing automation could help with uncertain labor and even social distancing. But consumers are demanding more choices, spawning a blizzard of SKUs. We love our Cheerios, but do we really need 23 varieties? (Including Pumpkin Spice, Limited Edition).
Even in normal times, private equity sponsors pay ruthless attention to cost structures of portfolio companies. Covid has raised to new levels the challenges buyers have managing supply chains.
“Eighteen months ago, Covid was a top-line issue; now it’s mostly a cost issue,” one partner told us. “We can pass price increases along, but with 90-days notice. That’s too long to wait.”
Another source agreed. “We’ve been playing catch-up all year,” he said. “Revenues are fine, but costs are out of whack. And here we are a year later – we thought this would be fixed by now!”...
Before Covid the persistent view of private credit was too much capital chasing too few deals. Transaction inflation was resulting in tight spreads, high leverage and weak terms.
When Covid hit this balance shifted dramatically in favor of the investor. Deal supply dried up, lenders retreated, and terms strengthed. But within weeks central bank liquidity ended that run.
Today the private credit pipeline is at record levels, fueled by a combination of near-zero risk free rates, low relative value for riskier assets, and volatility from more correlated strategies such as public equities...
One of the more fascinating aspects of the past 18 months has been watching the divergent economic narratives between headlines and data.
The Bureau of Labor Statistics reported a record high 10.9 million job openings in July. The three largest sectors comprising this increase were healthcare, finance, and food services.
Yet there also less than 9 million people unemployed. How can there be such a shortage of experienced workers when there are more jobs than jobless?
Last spring we were shopping for garage doors. Lumber prices had skyrocketed – almost to the price of gold. So we chose steel. As did everyone else. Wood is now cheaper. And we’re still waiting for our doors.
The industry publication Supply Chain Management Review reported that 2021 is on a record pace for factory fires – up 150% this year caused by “gaps in regulatory and process execution as well as a shortage of skilled labor in warehouses.”
They also analyzed data showing supply-specific shortages were up over seven-fold from 2020. These are due to merger-related activities, as new owners drive for operating efficiencies, leaner inventories, and lower costs. All while still attempting to meet evolving customer demand...
“The #unitranche was invented in response to broken capital markets, when banks were backing away. Today it’s thriving when markets are booming.”
The size of these financings has also grown dramatically. How large could they get? We remember the same questions being asked about broadly syndicated loans in 2007.
If the largest direct lenders collaborate, a $5 billion unitranche could come by year-end. Particularly with a large software company...
According to Refinitiv LPC, US #unitranche volume came to almost $22 billion last quarter – the highest level they’ve tracked historically.
At the same time, one-stop risk/return dynamics have moved in favor of issuers. The average debt/ebitda is now at a record high 5.9x, with all-in Libor spreads hovering around 600 bps.
As we told M&A magazine, recently, “The disintermediation away from the loan syndication market to private credit has accelerated in this hyper competitive M&A climate. That’s included their credit providers...
In October 2015 we published a white paper: “The Unitranche – What it is, and Why it Matters.” In it we called the unitranche “one of the most innovative, and increasingly popular, financing tools in the middle market.”
The following year Ares reached a milestone by leading, for Thoma Bravo’s Qlik Technologies, the first $1 billion unitranche. Other mega-tranches soon followed as larger issuers recognized the value of one-stop financing.
The broadly syndicated market, after all, involves more time to distribute and more lenders to negotiate with...
As we conclude our European private credit series, let’s review what we’ve learned:
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Europe suffered a similar Covid slump (and enjoyed a similar rebound) as the US. Deal volumes are at record highs. Europe retained the country-by-country distinctions they had pre-Covid.
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Pricing in the US and across the pond is close. Though European upfront fees are higher, certain terms are decidedly more issuer-friendly. Banks have been more aggressive than direct lenders in some locales...
This week’s Chart of the Week highlights how US and European private debt fundraising came into Covid with a head of steam, slowed, and has now picked up.
Our content partner, , recently published excellent commentary related to investors’ views of the “European opportunity.” One CIO said it started looking more attractive when US yields dropped precipitously last year. Since then, the difference in yields as shrunk.
According to PDI, there’s $116 billion of funds in the North American market, $85 billion in Europe and $12 billion in the Asia-Pacific region.
We continue our conversation with Lincoln International’s European office.
“US and Europe are competing markets,” Xenia Sarri told us. “The US was increasingly aggressive six years ago, but now terms are more favorable in Europe. There are no baskets around restricted payments. No excess cash flow sweeps, no amortization and tighter flex language.
Are there pricing differences? “Arrangement fees are twice as high in Europe as in the US,” Dominik Spanier said. “We think this is because the US is a more mature market. But margins (as our Chart of the Week shows) are very similar. Also, the European secondary market is less well-established.”...
Calculating European direct lending volume is a bit dodgy. But we can triangulate from other metrics.
The par amount of all leveraged loans was €15 billion in 1998, per S&P/LCD. It grew to 140 billion before the GFC, and is now a record €240 billion. Conservatively assuming one-third is held by non-banks, that puts it at just under €100 billion.
That’s consistent with Preqin data. As our Chart of the Week highlights, assets under management for European direct lending is almost $160 billion, including about $50 billion of dry powder...
Last week we tuned into Fitch’s European Leveraged Finance Mid-Year Update. The discussion – covering the economy, ratings, and structures – was virtually indistinguishable from recent US market conferences. Apart from the distinguished accents.
Volume, for example, has returned to pre-Covid levels. Terms, that were so investor-friendly a year ago, are now decidedly issuer-friendly. Price recovery is so complete, there’s nothing to tamp down frothy conditions.
Our friends at Tikehau reported 1Q activity, combining both loans and bonds, was €80 billion; more than double 4Q’s performance...
Our fondness for colorful metaphors led us, in our 2016 series, to compare European direct lending to Burger King’s new hot dog venture. The burger giant’s thesis was to apply “sixty years of flaming-grilling expertise,“ but also recognized they’d have to “chop the onions a little differently.”
Apparently, hamburger prowess didn’t translate to frankfurters. They were pulled off the menu six months later.
Similarly, there are fundamental differences between US and European private credit markets. A recent survey in Private Debt Investor showed only 22% of private equity sponsors favored unitranche solutions, preferring bank loans instead....
Say what you will about last year’s Covid-induced downturn in the US beginning in March. But it paled in comparison to the UK’s economic cratering. Not since the Great Frost of 1709 had that proud nation suffered such a dramatic slump.
But then, like the US, the UK and Europe began to recover in similar fashion. In the credit markets as well: from revolver draw-downs, to the commercial upswing and deal snap back in the fall, and the rush closings at year-end.
Five years ago we published a white paper that highlighted how European leveraged lending has historically been dominated by the commercial banks...
Higher #inflation generally impacts fixed income assets negatively as increased rates erode bond values.
Yet so far, as our Chart of the Week shows, those rates have actually decreased, resulting in fixed income instruments returning better yields for the second quarter.
Higher rates will benefit floating-rate instruments. As our high-yield bond friend Marty Fridson reported in a recent LCD piece: “The adjustable rates of leveraged loans would siphon off investment capital from high-yield....
We caught up with Joseph Lavorgna, Natixis’ chief US economist, who served recently as chief economist of the National Economic Council.
“People forget what real inflation is,” he told us. “I was seven years old during the oil embargo in the 1970’s when there were gas lines. Oil prices went from $4/barrel to $40. Imagine going now from $60 oil to $600.
“Today we’ve compressed years of economic build-up into one. Inflation expectations are stable, you’ve got a much more global economy, and demand for products and services has outstripped supply...
We continue our special inflation series with Nuveen’s chief investment strategist, Brian Nick. Are inflation worries overblown?
“Prices of certain goods and services are rising for a variety of reasons,” he told us, “all we believe will be transitory. April’s CPI report showed inflation will peak at a higher level this year than expected. But this “bump” should be over before the end of the summer.
“Even accounting for energy prices last month’s 0.9% rise in core consumer prices is a very high number. What contributed to that was a combination of stimulus, reopening pressures (see our Chart of the Week) and supply chain shortages...
The Federal Reserve is standing firmly behind its view that, despite April’s CPI increase of 4.2%, the highest since 2008, any inflation will be transitory. But some observers worry that pent-up consumerism will create inflation akin to the 1970’s.
In a thought piece published last month entitled “Why Our Managers Disagree on Inflation, Interest Rates and Growth,” Franklin Templeton’s strategists agreed prices were on the rise but questioned whether this was “cyclical” (moving with markets) or “secular” (a long-term event).
The Fed sees a wide variety of data, including very depressed sectors. Unemployment remains almost double of pre-Covid levels...
A question came from a reader on our series about the Lincoln Senior Debt Index. She asked: “I’m curious how the benchmark accounts for where the loan is in the cap structure?
Recovery rates for unitranche, 1st lien and second lien are different. So any portfolio would have to match the composition to effectively compare against the benchmark.”
Lincoln’s Larry Levine gives us the answer:
“We prepare various analyses of the Index, which contains only performing loans. As the first Chart of the Week shows...
Private debt is a relatively recent entrant to the alternative asset class. In 2007 private debt AUM measured less than $200 billion. Today illiquid credit is $900 billion with growth estimates of 50% over the next 5 years.
The Lincoln Senior Debt Index provides lenders and investors a much-needed tool to assess portfolio performance and benchmark returns in this otherwise opaque market.
We asked Lincoln’s Larry Levine, what is the average yield direct lending investors can expect to achieve?
Private debt practitioners have noted the shortage of credible benchmarks against which to compare various managers’ performance. Well, our friends at Lincoln International have decided to do something about it.
Their team has developed a loan index created from the 2400 private companies they value. Leveraging expertise across that broad middle market portfolio affords Lincoln the opportunity to contribute meaningful data to investors.
We asked managing director, Larry Levine, to give us more detail about the composition of the Index, and why it’s significant...
News reached us from Mars of the first powered Earth aircraft to fly on another planet. Ingenuity, a helicopter with four foot wide blades (and carrying a small swatch from the original Wright Brothers bi-plane), hovered at ten feet for 30 seconds then came back down.
“What the Ingenuity team has done,” a NASA official said, “is give us the third dimension.”
Here on Earth #CLOs are also three-dimensional. Their capital structures start with the least risky, lowest-spread debt at the top of the cash flow waterfall, to more risky, higher-spread liabilities and equity at the bottom. There are also active primary and secondary markets for these investments, with spreads depending on market conditions...
Leveraged lending is competitive. But it pales in comparison to the 2021 Mrs. Sri Lanka pageant. Reigning Mrs. World champion, Caroline Jurie yanked the tiara off newly-crowned winner Pushpika DeSilva, charging Mrs. DeSilva was not married. Mrs. DeSilva fled the stage in tears.
Order was eventually restored. Mrs. DeSilva reclaimed her crown, and Mrs. Jurie resigned hers. We look forward eagerly to the 2021 Mrs. World pageant to be held later this year…in Sri Lanka.
Meanwhile in the less dramatic world of middle market #CLOs, managers are working through the Covid environment and positioning for the rebound...
By blocking the Suez Canal last month, the Ever Given made headlines, creating a massive shipping traffic jam.
Three football fields long and weighing 250 thousand tons (by comparison, the Statue of Liberty is only 125 tons), the monster container vessel is the new global transportation reality: 90% of the world’s goods travel by water.
This marine mishap reminded us of #CLOs. Here are vehicles that transport 70% of all leveraged loans, each CLO containing hundreds of assets. They also risk getting beached when market winds blow sideways. ...
So what happened to #CLOs during Covid? When the world stopped last March, as our own CLO manager, Kelli Marti, told us, “everyone looked first to their health of their portfolios. The key was preserving the value of the underlying collateral.
“Two things mattered,” she said, “triple-C exposure and OC cushions. If triple-Cs are too high, fund flows may be redirected, suspending payments to the lower debt and equity tranches.”
Before Covid, 5% of the LSTA Leveraged Loan index was rated triple-C. Adding B- assets gets you to a combined 25%, up from 15% two years earlier...
“Anytime loan market technicals shift, there’s always a view that CLOs are the end of Western civilization as we know it.”
That’s what a top #CLO manager told us about his experience over several decades. Regardless of actual performance, CLO’s regularly get hauled out by the media for reckless behavior associated with“risky loans.”
Back in 2014 we published a white paper – “Why CLOs Matter” – that showed how CLOs have adapted to changing market conditions over their history and had a remarkable track record over many business cycles....
We wrap our special 2021 outlook with #privatecredit.
Its value proposition was fully supported last year, coming through the pandemic mostly unscathed. But with conditions becoming more issuer-friendly, how will private credit terms be impacted?
When liquid loan yields contract, illiquid loan yields tend to follow. But they carry at least a 100 bp premium, and at least 200 bps vs. high yield bonds...
We continue our special series on The Great Reception, a year that’s welcoming all investors. This week we look at the capital markets: funds flow, asset behavior and deal quality.
With each passing day, the light at the end of the COVID tunnel grows brighter. That newfound optimism has put upward pressure on interest rates.
As our Chart of the Week shows, the ten-year Treasury is up 70 bps, while investors anticipate an earlier Fed rate hike, now mid-2024.
Higher rates have chilled high-yield bond funds. There have been $4 billion of redemptions six of the past seven weeks, per S&P LCD. Bond volume is also off, from $60 billion last June to $24 billion so far this month....
What have you missed most over the past few months? Well, if you said “Grape-Nuts” we feel your pain. Our beloved cereal has gone missing from supermarket shelves across the US.
First produced in 1897 Grape-Nuts accompanied Sir Admiral Byrd to Antarctica and Sir Edmund Hillary to Mount Everest. But don’t worry. They’ll be back. The cereal, that is.
In the meantime Post Foods is running a contest. Ten lucky winners will receive a year’s free Grape-Nuts supply. Everyone else gets a coupon.
Credit investors, meanwhile, are hoping for a year’s healthy supply of deals. And it looks like both the economy and markets are cooperating...
We conclude our special series, “Five Biggest #PrivateCapital Surprises of 2020,” with:
Surprise #5: The M&A Big Bang
Last July published a white paper on COVID-19 and M&A Activity. It was called “COVID-19 and M&A Activity”. Besides logistical challenges, there were worries about second and third infection waves. “We’re expecting a light second half,” one banker told us.
Ok, so that didn’t happen....
We continue our special series with the fourth of our “Five Biggest #PrivateCapital Surprises of 2020:”
Surprise #4: Which Industries Mattered?
For experienced credit managers, diversity is a key investing principle. The question coming into last March’s downturn was, have we made the right decisions on industries to lean into and out of?
Generalists avoid cyclicals such as energy, retail, and high-end consumer. Unlike the Great Recession, though, the COVID cycle impacted businesses where consumers had to leave their homes...
We continue our special series with the third of our “Five Biggest #PrivateCapital Surprises of 2020:”
Surprise #3: Where Are the Distressed Loans?
Last April the CEO of a large asset manager said the volume of potential distressed credit investments could be $1 trillion. COVID, he said, presented “a massive opportunity to deploy capital at a critical time for the U.S. economy.”
Nine months later we’re still waiting for that opportunity. The speed of the Fed’s rescue helped larger corporate borrowers in tough sectors like airlines and cruise lines. Private equity jumped in quickly along with their portfolio lenders to provide capital and covenant flexibility to middle market companies...
We continue our special series with the second of our “Five Biggest #PrivateCapital Surprises of 2020:”
Surprise #2: Non-Correlated Trends – Infections, Markets, and the Economy
At their lowest moments in the Global Financial Crisis and the Global Biological Crisis, financial markets swooned in synch as investors found no safe havens. Bad news sunk everything. To paraphrase Tolstoy, happy markets are happy in different ways; unhappy markets are alike...
Because last year was so unique, to really capture its themes adequately we’re kick off our special series: “The Five Biggest #PrivateCapital Surprises of 2020.”
Surprise #1: The Market Snap-Back
Hard to remember now, but by last March 23rd the Dow plunged almost 11,000 points in less than six weeks to 18,592. Today it sits at almost 31,000. No one knew at the time, but the market had bottomed out. If you went to cash, you lost...
December was lost in a fog of masks and Netflix bingeing. But one item that penetrated our consciousness was a superb credit webinar, courtesy Lincoln International. Their data, gleaned from over 1600 portfolio companies, are a strong proxy for #privatecredit behavior:
For example, sector performance underlined valuation advantages for less COVID-impacted industries such as tech, healthcare, and business services. The losers remain energy, consumer discretionary, and real estate.
The “better” companies are pushing multiples above the previous high watermark of Q4 2019 of 9.8x ebitda to 10.4x at Q3 2020....
As we wrap up our special #SPAC series, let’s take a look at the performance of these vehicles over time.
According to research firm Renaissance Capital, of the 200-plus SPACs launched since 2015, 107 have completed mergers and gone public. Shares in those issuers averaged a loss of 14%. Compare that to an average regular-way IPO return of +49% over that period.
This year there have been 194 traditional IPOs for $67 billion – the highest level in six years. SPAC activity as been similar 200 vehicles for $64 billion...
Workers unwrapping the Christmas tree at Rockefeller Center last month found a little present. The 75-foot high Norway spruce from Oneanta, NY was sheltering what appeared to be a baby owl.
The stowaway turned out to be an adult northern sawhet that hid in the branches until it was discovered. No word whether “Rocky” planned other holiday stops on his NYC tour.
Year-end festivities do include more SPAC closings. “There’s been a significant surge of activity on the front end,” one SPAC lawyer commented, “so there needs to be an increase in [merger] activity.”...
For Thanksgiving the noted sommelier and “lifestyle director” Sara Lehman reviewed eleven wines – cabernets, pinot grigios and rosés – all under $10.
Selections came from Trader Joe’s (“It’s reminding me of apple juice”), Costco (“Give it a nice swirl first”), and BJ’s (“I’m getting some barnyard”). The winner? Target: “If I were to bring something less expensive to my friends.”
$10 prices reminded us of SPACs. These ‘blank-check’ companies differ from regular-way IPOs by being priced at $10/share, and floating from there.
SPACs sponsors are seeking investments in colorful sectors...
Besides COVID, the elections, and what the fifth instalment of the Scream series will be called (it’s not Scream 5), what’s getting the most attention is #SPACs, or special purpose acquisition companies.
These are publicly traded shells with cash looking to buy businesses. SPACs were originally designed to help smaller companies access public equity. For various reasons, they’ve never taken off. That’s changed.
As our Chart of the Week shows SPAC IPOs zoomed this year. So far in 2020 there have been 183 such vehicles raising $66 billion. Compare that to 2019 when only $13.6 billion was raised from 59 IPOs...
Answer: For most of US history, it was March 4, not January 20. Question: What is Inauguration Day?
We found ourselves channeling our inner Alex Trebek this week as the nation’s attention began shifting from elections to vaccines.
Pfizer’s trial results sent Wall Street to record highs. But on Main Street rising infections are propelling a third virus wave across the US, with almost a million new cases reported last week – up from 600,000 only a week ago.
With winter upon us, COVID will unfortunately march on, impacting commercial activity again...
Given all that’s gone on this year, it’s unsurprising that Election Day came and went, with only a big “TBD” to show for it.
Results now are mostly in, but this uncertainty had little impact on the capital markets. The S&P had its best week since April and bond yields sank only mildly. As is often the case, business thrives when government is gridlocked.
October’s HY bond volume of $34 billion, the second highest October ever. BSL activity reached $44 billion for the month – with September’s $50 billion, the best two-month performance since pre-COVID...
150 million US adults will “participate in Halloween-related activities,” according to a survey. 53% will decorate their homes and 18% will “dress up their pet.”
We tried to imagine getting our cat Serena into a pumpkin costume. Not happening. But we are encouraged Americans are spending for the second-costliest holiday of the year.
Putting cash to work is also much on the minds of private credit investors. With 60 shopping days left in the year, appetite for yield remains keen.
Some worry that market conditions will get frothy again. But the data doesn’t support that...
We were sad to hear of Coca-Cola’s decision last week to discontinue Tab by year end.
Launched in 1963 Tab was a pop culture icon, appearing in Back to the Future and Ghostbusters. But competition from Diet Coke spelled its demise.
It takes superior management to keep brands vital. Remember Scooter Pies, Quisp, or FudgeTown cookies? Without support even popular snacks will fade away.
Private credit, similarly, features a number of participants, but not all created equal. Some have long successful track records. Others, as one friend put it, “are operating without a driver’s license.”
A reporter with one top institutional investor-focused publication asked about our view that 2020 could be the best vintage for private credit in a decade...
The journal Astrobiology has highlighted 24 planets that could possibly sustain life. Criteria for “superhabitability” include stars younger than the Sun and atmospheres with warmth and moisture greater than Earth.
All these planets are over 100 light years away – not ideal for COVID getaways. But for those who don’t mind long trips with the kids, such conditions could mean more longer lifespans and a nicer lifestyle.
Other extraterrestrial news this week came from our content partners who published findings on third quarter fundraising...
“If you liked private credit before, you’ll really like it now.”
That’s the way one practioner neatly summed up how investors should be thinking about the asset class in a COVD environment.
The trends supporting that thesis this year should continue well into 2021. A sizzling economy doesn’t really help credit. No worry there. Unemployment is down, but that’s because people have dropped out of the labor market.
Only half of the 22 million jobs lost since March have returned. 4 million jobs in the restaurant, travel, hospitality and leisure industries are gone for good...
With all the distractions of the moment, it’s hard to remember that US GDP dropped 33% in the second quarter – the sharpest decline in history.
It looks, though, like the third quarter is poised for one of the biggest economic rebounds, with estimates around 30%, depending on the impact of stimulus programs that have (or have not) been enacted.
The 2020 downturn may not even qualify as a recession. But businesses are split between COVID-sensitive sectors – which aren’t expected to recover anytime soon – and many in B2B, that have been recovering for months...
We mentioned last week the #SuperReturn North America Virtual conference, where we heard participants on the pandemic’s impact on private credit terms, structures and portfolio performance.
But what about new business? A lot depends on managers’ strategies. Institutional investors had expected a downturn for a while.
Significant capital was raised to take advantage of fall-out from the recession when it came. Declining valuations and operating performance would cause mainline lenders to retreat from financings. Opportunistic funds would then step in....
A #privatecredit practitioner would have found no better place to spend the week than at the #SuperReturn North America Virtual conference. As chair of Day One, and on three lender panels your correspondent had a front row seat listening to GPs and LPs describe how they were dealing with the effects of COVID-19 on portfolios, new deal flow, and fundraising.
The astonishing thing was how consistent reactions were across multiple strategies. Everyone saw initial deal flow come to a stand-still in March and April. They witnessed borrowers quickly inject liquidity and cut operating costs. And they were surprised when valuations and performance relative to covenants wasn’t as bad as they thought they would be.
Once portfolios stabilized, direct lenders were more receptive to new transactions. Pricing, at first, was well above 2019 levels; leverage more in line with 2011 than 2020...
While public markets appear to be headed to more choppiness this fall, private markets are just gearing up. We suspect the same worries bedeviling liquid markets are supporting M&A. As a seller, why not cash in your chips today, rather than risk a reduction in your after-tax proceeds tomorrow?
Financings are being issued at a faster clip than just a few months ago. And while terms have eased somewhat in favor of issuers compared to the first quarter, they’re still more investor-friendly than last year.
What factors will determine the direction of terms for the rest of the year? Well, for one thing: supply/demand. Mid caps are creatures of competition. The bigger the pipeline, the more choices investors have, so the more likely issuers will see push-back on terms...
Over the past five months, we’ve examined the impact of COVID-19 on the economy and the markets and interviewed top private equity and investment banking partners on deal making in the U.S.
What’s largely lost in media reporting is the dramatic turn in #privatecredit.
This asset class emerged from Great Recession to become one of the fastest growing for fundraising and investing. Various trends, greater bank regulation, vast PE dry powder, soaring valuations – all pushed issuer terms to increasingly competitive levels.
Credit investors found themselves having to choose either the largest fund managers, who won transactions with the least investor-friendly terms, or opportunistic lenders offering higher yields…with much higher risk...
Investors are asking, what is the “new normal” for businesses? Unfortunately, as a recent Accenture study notes, “normal isn’t available to us anymore.”
In the absence of normality, sponsors and lenders are adapting.
“We historically focused on six sectors,” one PE partner told us. “COVID swept two away, leaving four. We’re still getting books on the others, but we’re running with traction areas.”
Investment bankers have seen industries up-ended. Recession-resistant businesses – like gyms – have been slammed. Others like print catalogs have flourished as consumers’ attention shifted to things closer to home....
Financing companies in a COVID environment is as challenging as buying and selling them. Top M&A bankers gave us their list of do’s and don’ts.
“There are a lot of twists and turns today,” a mid-West MD told us. “You may think the company you’re trying to sell is operating at pre-COVID levels, but what happens if this virus stuff backs up?
“In the current climate you don’t want to run a big process. Having dozens of lenders see softer monthly numbers is not a path to success.”
Another source agreed. “You don’t want to have all the lenders talking to each other. It’s best to keep it to a tight circle. We’re seeing situations where only existing lenders are being asked for term sheets.”...
As deal makers have adjusted to the new normal of business openings (and re-closings) across the country, conversations are now back to M&A processes.
How has the pandemic affected deal timelines? “The time to market will inevitably elongate,” one top middle market banker told us. “Buyers and sellers will need more preparation to assess the impact of COVID. What’s unknown is whether the ramp-up in cases in the US will stall the market.”
What kind of constraints are drags to M&A? “Travel restrictions are the most obvious,” another banker said. “Quarantines limit the ability of management teams to build rapport with buyers, and to manage due diligence.”
“What’s particularly challenging now is the differing COVID status by state. Also conflicting state-by-state restrictions can put deal principals at risk.”
This week we kick off a new series on COVID-impacted deal flow, with a look “upriver.” How has M&A activity been affected, and what should deal makers expect for the “new normal?” We interviewed top middle market investment banks about their experiences so far in this coronavirus season.
The beginning of the crisis caught advisory firms (and the rest of us) flat-footed. “Of the deals we had in the shop when the music stopped in early March, roughly 80% were put on hold,” one partner told us.
Another sell-side MD agreed. “Things came to a screeching halt,” he said. “We adjusted our expectations down to 20% of normal in the early days. It’s climbed back up, and we’re seeing a good amount of activity, but it’s still half of what it was. The flow has gone from about two or three deals a week, to one or two...
As part of our special healthcare series we spoke with the partner of a NY-based private equity firm. He has two decades of experience investing in healthcare businesses.
We asked how the current crisis unfolded for your firm?
“For the first couple weeks it was 100% focus on the portfolio,” he told us. “Turned out it’s been pretty resilient, so we could turn our attention to new opportunities.
“Our team has all invested through the Great Recession. We know these are the moments when, if you didn’t invest, you’d wish you had.”
Were some sectors affected more than others? “...
Two years ago, we issued a special report on healthcare trends. We recently revisited one of our sources, a top healthcare investor.
“Everyone’s an infectious disease expert now,” he told us in an interview. “We need to change the way we look at infection. There are about 40,000 deaths annually from the seasonal flu. It affects infants and the elderly.
“Corona diseases have mutated. Real treatment is driven at the federal level. Like seat belts. With COVID-19 you need everyone to get vaccinated.”
How has government managed so far during this crisis? “The CDC made some early mistakes on testing. As with 9/11 certain people knew early on about the virus. But they didn’t coordinate with other agencies...
We continue our special healthcare series with the heart of the matter: the doctor/patient relationship.
We asked our primary physician in a Zoom interview about his experience.
“Thank goodness for telemedicine,” he told us. “I can be very effective and have meaningful discussions with my patients. A lot of these now involve testing for the virus antibodies, which is easy and quick.”
How will this pandemic change patient behavior? “Patients are acutely aware now of how these viruses spread,” he said, “and how to protect themselves from infection...
Healthcare has been ground zero for the worst pandemic of the modern era. How the industry has reacted and how credit and equity providers are dealing with this new world order, is the subject of our new special series.
“Physician practice management companies were the first and worst hit,” one banker reported. “Procedure volume dropped precipitously with COVID. One anesthesia practice that serves surgery centers and hospitals saw Ebitda go from $100 million to zero.
“Most of these orthopedic, cardio, and GI procedures were elective. It’s a great franchise, he said. They haven’t lost a single doc. Procedures now appear to be rebounding. EBITDA has only begun to lift, but lenders believe a recovery is inevitable.”
Interestingly the business was purchased in the teeth of COVID. So the sponsor was able to buy it on the cheap. As ugly as things look right now, investors are taking the long view. So lenders are willing to stand behind them.”...
“Time to go to cash,” we announced recently at the dinner table. The Dow had almost climbed back to its February 12 peak. “What does that mean?” our six-year old daughter asked. Her mother replied, “It means Daddy wants to put our money in a mattress.”
Unfortunately more pressing matters – like whether to give our ten-year old a cell phone (we did) – intervened, and the moment was lost.
Being held hostage to headlines is how liquid assets behave. You can ride the wave up on good news, but bad news sends the roller coaster right back down. Even credit assets can be hijacked by fund flows and Fed moves....
In our just-completed series on high-yield bonds, we concluded that issuer and investor activity has largely been driven by technical factors: near-zero interest rates, the Fed’s support of fallen angels, and skewed-to-worse ratings for leveraged loans.
How then should investors be thinking about the illiquid market?
Private credit has a different profile than tradable assets. It provides investors with steady income (and issuers with long-term credit solutions), regardless of market volatility.
As our Chart of the Week shows, middle market loans sport higher yields over time than other asset classes...
What’s been described as “massive” new issuance in the high-yield market led to the most deal volume for May ($48 billion) since 2003, according LevFin Insight’s Matt Fuller.
As our Chart of the Week depicts, cash inflows to bond funds totaled over $35 billion in the past nine weeks. That includes the top three weekly inflow numbers ever recorded.
By contrast, retail loan funds saw out-flows of $18 billion in March and April alone. What’s behind these contrasting dynamics?
We continue our special series on high-yield bonds with a look at more deals in the market, with our tour guide, Matt Fuller of LevFin Insights.
Northwest Fiber came out with a loan/bond buyout of Frontier Communication assets. This could grease the skids for other regular-way LBOs.
Another flagship deal was for Viking Cruises (B-/B1). Launched as a $675 million five-year issue, the bonds were secured by a first-lien of twenty river boats. All-in pricing was almost 14%. Also sailing along was Royal Caribbean, still with investment grade status. The company sold $3.32 billion of secured bonds....
One of our readers asked for help deciphering what was going on in the high-yield market. So we recruited Matt Fuller from our content partner, LevFin Insights.
“From the perspective of high-yield investors,” Matt told us, “it’s a great time to be involved. We were pretty much shut down in March.
Total volume was only $4 billion, which is very paltry. Zero deals for three weeks. That’s shocking, but one week shorter than December 2018, which marked the lowest volume since the GFC.
“Then in April it came roaring back from $4 billion to $44 billion. That was the most activity since March 2017...
The Bank of England has projected the COVID-19 pandemic will cause GDP for the UK to decline 14% this year. That’s the worst economic performance in three centuries.
In 1706 (when the Bank of England was twelve years old) Great Britain was a very different place: devastated by wars and weather, the union with Scotland still a year away, and Twinings producing its first tea bag.
Fast forward, across the pond the US economy has also been slammed with shocking labor numbers. Unemployment went from 3.7% at year-end 2019 to 14.7% today. And worsening...
As we wrap up our COVID series, we turn our attention to the path ahead, as unclear as that is. Or as one economist put it succinctly: “Anyone who thinks we’re going to keep moving up in a straight line is living in La-La Land.”
The good news is markets have fully absorbed the shock of America stuck at home, and its impact on commercial activity.
The wide discount in secondary loan prices has shrunk. Credit investors are left with higher values, though fewer bargains. But what are the revenue and earnings assumptions behind those new values?
Credit managers now have a ring-side seat to deteriorating borrower performance combined with the issuer-friendly terms of past buyout financings. Expect those terms to change...
“The GFC was a crisis that began on Wall Street and spread to Main Street. COVID-19 is a crisis that began on Main Street and spread to Wall Street.”
That’s how one private credit manager compared the two worst downturns since the 1930’s. With the coronavirus still in its early stages, this pandemic might end up worse in some respects than any of them.
Most recessions are caused by a misallocation of capital, whether mortgages, high tech, or emerging market debt. The Great Recession began with too much leverage in the system.
This time the banking system was healthier than its ever been. A biological threat forced lock-downs, bringing commercial activity to a stand-still...
If you’re watching this broadcast from your home office, you’re not alone. According to one study, 97% of the US population is either at home or sheltering in place.
This has completely upended the free-flowing, dynamic nature of the largest, most diversified economy on the planet.
-Industries that took decades to develop competitive products and services to meet consumer and commercial demand, have been thrown into disarray.
In the early phase of the crisis, investors studied the most obviously vulnerable sectors for weakness. These included travel, leisure, hospitality, gaming, transportation, and retail. These all took almost immediate revenue hits...
This week we wrap up our conversation with Brian Nick, Nuveen’s chief investment strategist:
Q1: How do you compare this cycle with the last one (Global Financial Crisis)?
Q2: The Fed did jump in pretty quickly to cut rates to zero. Are they out of weapons?
Q3: Do PrivateEquity firms have any Federal rescue programs available for their MiddleMarket portfolio companies?
As goes COVID-19, so goes the nation.”
We rephrase the famous 1950’s dictum on General Motors’ relationship to the national welfare in examining how the coronavirus has hijacked all aspects of the economy...
“We did not underwrite for this.” So said the partner of a top-tier middle market private equity firm, speaking of the challenges dealing with the impact to businesses of #COVID-19.
“We always model downside scenarios for investments,” told us. “But the zero revenue case wasn’t one of them. This is such a dramatic shift from anything anyone has ever encountered. We’re working 24/7 to figure it out.”...
On February 12 a columnist Barron’s wrote: “The three main U.S. stock indices closed at record highs as concerns over the coronavirus economic impact seemed to fade…Can anything stop this rally?”
That was six weeks ago. The Dow was at 29,551. Today it’s 8,000 points lower, the economy at a standstill, global markets in shambles, Americans stuck at home...
This week we’ve been doing bedchecks on our friends in the #CreditMarkets. We caught up with one long-time practitioner, hanging out in the home office with family in “bathrobes and bunny slippers.”
“The capital markets went from price perfection to price combustion,” he told us. “There’s a lot going on behind the scenes, nothing in the market.”...
Back on January 8th, we reviewed credit market conditions in the wake of the killing of an Iranian general. Could this be the exogenous factor that sparks a Middle East war, and triggers a recession?
We concluded with the following observation: “Whether the Fed can continue mainlining enough liquidity all year to overcome any exogenous risks – bubbles or stickier stuff – remains to be seen.”...
Private credit assets don’t trade. That distinguishes them from more volatile public credit correlated with market moves. Middle market loan yields are therefore more stable through business cycles...
This idea comes from the prevalence of record high borrower leverage and cov-lite structures. If performance deteriorates, lenders have no triggers until a payment default...
Private sub debt regularly gets kicked around at conferences for being “dead.” Particularly with the advent of unitranche financings...
For issuers one of the virtues of private credit is being available when public markets aren’t available. Buy-and-hold private credit managers have locked-in capacity. Since the assets are not liquid, transactions can be structured with long hold periods and without relying a market take-out.
It’s a myth that’s applied regularly to leverage loans. The universe of broadly syndicated loans is as large as that of high-yield bonds, so that must be a bad thing...
According to the World Happiness Report, Finland topped a list of 156 countries. The US was 19th, and South Sudan as the least cheerful place to live...
A Dartmouth College professor has found that middle age is even more depressing than we thought. But things start looking up pretty quickly after that.
In a recently published study, David Blanchflower found unhappiness is a U-shaped curve, bottoming out when people are 47.2 years old.
But after that, people start feeling better. By the time they hit their 60’s, they’re as chipper as they were in their 20’s. Or maybe they just forget how miserable they are.
Investor happiness is a topic we’re studying: How do investors feel today about #PrivateCredit, and has that changed over time?
The economic story has certainly changed. Worries about a recession have been , replaced by strong corporate earnings and public equity indices at record highs...
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Remember your summer internships in high school? Neither do we.
Wolf Cukier’s stint at NASA’s Goddard Space Flight Center last summer could have been equally forgetful. The Scarsdale, NY teenager began it by searching for anomalous star patterns amid reams of satellite data.
On his third day he noted an odd image near a binary star system. It turned out to be a planet, now labeled TOI 1338 b. Of his discovery, Wolf said: “It definitely colored the rest of the internship.”
Observers are scanning for similar signs of life in the leveraged loan universe. As our Chart of the Week shows 2019 volume slumped 35%, from $1.2 trillion to $808 billion, according to Refinitiv LPC .
In part, this is attributable to the natural ebb-and-flow of financings. It’s also rate-driven, as refinancings have fallen off with the bottoming of interest rates...
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Investors today are faced with mixed signals. November’s impressive labor report of 266,000 job gains went a long way to easing fears of an imminent recession.
But with buoyant markets brought fresh bubble fears: Are prices overinflating? Are valuations headed for a bigger fall down the road? And won’t terms and structures continue to weaken as direct lenders compete to put money to work? Ad infinitum.
CLO managers, in a flight-to-quality strategy, have focused on strong single-B and double-B names. That left vehicles with unused cash....
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As a long-term participant in the credit markets, we’ve learned the most intriguing times are not when things are going swimmingly for issuers or investors. Life is becomes interesting when trends begin to shift, at the inflection points.
These are often apparent only in hindsight. The Great Recession, for example, ended in June, 2009 – barely six months after the rescue of General Motors and Chrysler. Yet it wasn’t officially announced (by the Business Cycle Dating Committee of the National Bureau of Economic Research) until September 2010.
And predictions are tricky. Calls for the next recession have been numerous, and wrong. Signals, like an inverted yield curve, have turned out to be premature.
Tied to economic fortune is the direction of interest rates. Both cause and effect of business prospects, rates were headed sharply up last year. Until the market’s surprise tanking in November led the Fed to hit the brakes and reverse course...
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Recently the Lead Left traveled to Asia to assess how institutional investors view private debt today. One highlight was serving on a panel with other experienced asset managers at the Private Debt Investors Forum in Tokyo...
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“Where to draw the line is also key as we examine Senior Stretch and Unitranche loans. Besides leverage and loan-to-value, yield is helpful in identifying these financings.
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This week we fearlessly tackle one of the most frequently asked questions in private credit: Namely, where do you draw the line between a Senior Stretch loan and a Unitranche?
It’s a topic that’s gained increasing traction as issuer leverage has risen steadily, going back well before the financial crisis. Back in the early 2000’s when middle market first-lien was 3-ish times debt-to-ebitda, along with mezz or second-lien, you could “stretch” a senior-only financing to 3.5x, maybe 4.0x.
Today Refinitiv LPC data shows all-senior midcap leverage for private sponsored club deals has risen to 4.2x. Similarly, first-lien leverage (with second lien) is up to 4.5x.
Compare that to unitranche leverage. Back in 2013 single-tranche debt was 4.9x; today it stands at 5.3x. All these levels are the highest since the Great Recession...