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9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

At a glance, private credit and special situations might sound like two different arenas. But to Jennifer Daly, a partner at law firm King & Spalding and head of the firm’s private credit and special situations group, the two go hand-in-hand.

We sat down with Daly to hear more about trends she’s seeing across her practice, the different playbooks banks and private credit firms can draw from in restructuring, and the potential for creditor-on-creditor violence in private credit. We also got to hear about her side gig in musical theater.

This interview has been edited for clarity and length.

1. This is your second stint at King & Spalding. You were first a partner there from 2004-2011, then you went to Davis Polk, then Bank of America, then Avenue Capital, then Hunter Peak Investments, and then you returned to K&S in 2017. What brought you back?

My odyssey on the business side taught me so much and gave me such a unique perspective, but I think the biggest thing I learned from being away from the legal profession was that I love being a lawyer. 

I’m a deal junkie. I love language and the idea of words on a page being able to solve problems and dictate outcomes.

There’s something that I find very exhilarating about being able to structure a solution, guide towards an outcome, or create a trend with little more than language and what’s in my team’s collective brain. 

I love being a lawyer and I’m passionate about the results and service that we’re able to deliver for our clients when the stakes and stress-levels are at a peak. I truly just love it.

Being on the business side, though, made me realize that I could offer something different to clients on account of being able to truly think like them and understand their day-to-day pressures and professional dynamics.

2. Can you tell us how it is that the group you head is both Private Credit and Special Situations? What's the intersection there?

King & Spalding has traditionally had a strong regional banking practice, but we’ve also been on the cutting edge of the development of private credit. We actually did a lot of the very first unitranche deals done when the first senior secured loan product was launched.

When I think about Private Credit and Special Situations, I don’t think of it so much as an intersection as I do covering all stages of the lifecycle of an investment.

We’re organized similarly to how our clients behave: we do the front end performing loans, whether they be an LBO-type acquisition or otherwise, and then we represent those clients all the way through the lifecycle, including through period of distress, restructuring and even possibly taking the keys and doing a new M&A transaction with a brand new acquisition and financing. It’s cradle to grave and back again.

By understanding how our clients think and how they may look to put in additional capital or solutions when a business has a need, we’re able to advise them in any situation. 

This visibility and deep understanding of all stages of the lifecycle also helps us advise private credit clients and evaluate new liability management exercises (LMEs) or more opportunistic transactions.

3. What distinguishes private credit from banks when it comes to distressed situations and restructuring?

Private credit providers answer to two gods: their LPs and their leverage providers, but they otherwise have flexibility to speak for big loans and hold them for the entirety of their tenor. That is one thing that distinguishes them from banks in all contexts.

Banks have a ton of regulatory constraints and capital reserve requirements. Private credit funds manage money of sophisticated investors, so the regulatory pressures are just different. In a distressed situation, these differences can feel more acute.

For example, private credit lenders can exercise all rights and remedies, and ending up owning a company is something that many private credit funds can get comfortable doing even if it wasn’t their primary objective when they initially made a loan. 

They have a wide range of tools they can take advantage of when trying to think about how to protect an investment, including putting in more capital.

For a bank, many such tactics and outcomes are not feasible.

From a legal perspective, I hear a lot of people who dumb down private credit and say, “Oh it’s all leveraged finance, just leveraged finance.” I vehemently disagree. 

Private credit funds are different than banks for the reasons mentioned above and many more. My team and I see and understand that.

4. How does private credit's links to private equity inform those differences?

Many private credit funds already have an existing private equity side of the house, so exercising some of the most fundamental rights of a secured lender like foreclosing on stock and exercising proxy rights – basically taking control of a company – is something that many private credit funds are already comfortable doing. 

It’s basically already in their DNA. They can hold the paper and they can exercise their rights in a default scenario.

In a syndicated bank world, the bank has typically long syndicated out a controlling position by the time there’s any sort of meaningful performance issue, which means you now need to deal with ad hoc groups, often times numerous and populated with some holders — like CLOs — which might have a less flexible mandate in terms of being able to own a business. 

I don’t think it’s a coincidence that you’re seeing more out of court solutions and taking of keys at the same time you’re seeing more private equity transactions funded with private credit debt. 

It’s a combination of players and investment strategies that can lend itself to out of court solutions and/or solutions that involve taking the keys.

5. How much more prevalent is it now, say, versus just five years ago, for a private lender to assume ownership of a company that can’t meet its debt obligations?

It’s necessarily more prevalent even if for no reason other than where we are in the cycle based on interest rates and economic climate. That said, even putting that to the side, I think the norms have shifted and it’s more common. 

It used to be that the majority of bankrupt and distressed scenarios were run through a Chapter 11 process in court. And then people started to realize that an in-court process is not always the only choice.

You started to see more and more pre-packs filing where the major issues are negotiated and resolved before you would even file, with the time spent in court getting shorter and shorter. 

And then there came a time when certain private equity firms that had funds that were coming to the end of their cycle and were harvesting investments would say, “Look, we’re not getting traction running a sales process, we don’t have any more money to put into this business, we’re willing to hand over the keys. Just take the keys and we won’t even go into court.”

While it’s certainly the case that there are many times when an in-court solution is necessary or optimal, private credit and private equity are pretty flexible asset classes and so when they partner together it leads to scenarios where all options are typically on the table. 

Taking the keys is an option that you see being used consensually with more frequency. Chucking the keys at a lender when they’d rather not have them is something you see happen as well though.

6. That sounds like there’s certainly more room for tensions between sponsors and private lenders on the horizon, but in the private credit market, is there any room for so-called lender-on-lender violence?

First of all, whoever does PR for private equity should get an award because that buzzy little phrase manages to write the private equity sponsors out of the narrative entirely, and I don’t think that’s necessarily reflective of reality. 

Most lenders, banks or funds, are not sitting around, playing at-home Dr. Evil, trying to figure out ways to disadvantage fellow lenders.

These transactions are put together often times because a portfolio company has a liquidity need or another issue, such as an impending maturity that needs to be addressed. 

And then typically the sponsor and some lenders put their heads together to solve it within the confines of the existing documentation.  This can involve creative thinking and, sometimes, results that contravene traditional expectations of secured lenders.

That said, I was raised to believe there is no such thing as a free decision. There’s reputational risk around leading or participating in an LME. Sponsors are making private credit look and feel more like syndicated debt. 

While many private credit funds will want to speak for an entire deal, the private equity sponsors will often say, “Well, we need to cut in these other participants.” Some participants can say, “Well this or that lender doesn’t play well in the sand box and really hurt my firm in an LME so I can’t club with them,” and that can become a discussion.

That’s all to say, I think it’s naïve to think LMEs aren’t happening in private credit. They are, just not on the same scale, and the deals are private, so we don’t hear about it as much.

7. How much tighter are the documents and lender protections in the private credit market versus the bank syndicated loan market?

The terms are still tighter and private credit docs are still more protective. That said, even some of the bigger deals in the syndicated market are starting to include limited Serta, J. Crew and Pet Smart protections. 

Things that have made the news are starting to be identified across the board. But the devil is in the details with docs and private credit docs tend to be more negotiated with more back and forth even when an agreement is made upfront to underwrite a specific precedent.

8. Do you think those differences will help stem the more aggressive types of LME we’re seeing?

Honestly? Maybe somewhat, but the truth of the matter is that people still do not appreciate just how much you can accomplish with required lenders. For instance, most documents do not make modifying J. Crew protections, Pet Smart protections, unrestricted subsidiary provisions, or negative covenants generally a sacred right.  

If you hold a majority you can really do a lot including — and this is very important — enter into long-term forbearances from exercising remedies in connection with events of default that you would otherwise need 100% vote to waive. 

This is a really powerful tool for required lenders, and I don’t think the market fully gets it yet in terms of what can be accomplished by using that tool.

9. Lastly, and perhaps most importantly, we notice that on social media, you count “Broadway Producer” among your titles, and indeed, we found out that you have produced several shows, including a revival of “Frankie and Johnny in the Clair de Lune.” How does that fit into your life as a corporate attorney?

Ha! You discovered my side hustle: My quest to win a Tony. So, my involvement in the American Theatre Wing (I’m on the board and I’m a Tony Voter) came about when I got a little sassy one night at a cocktail party and told a room that there needs to be a better connection between Broadway and Wall Street. The rest is history!

When it comes to producing, I specialize in what we in the industry call artistic triumphs/financial disasters. Although I’m pretty good at artistic flops too! Joking aside, the parallels between theater and law are very clear to me. 

A lot of people underestimate how much creativity there is in practicing law. We traffic in words and performance – those are two of our greatest currencies in this profession. And I draw so much inspiration from theatre and other creative mediums in my work.

My current practice has and continues to be meaningfully influenced by “Hamilton,” “Natasha, Pierre and the Great Comet of 1812,” “The Beauty Queen of Leenane” and Alan Cumming’s performance in “Cabaret” (1994 version), just to name a few.  And I’m going to win that Tony, stay tuned.

9Questions is our Q&A series featuring key decision-makers in the corporate credit markets. For more in the series, check out the 9questions tag.

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