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Private Credit 

Fabian Graber

Welcome to Taking the Credit, 9fin’s weekly observations on the issues affecting the European private credit market. Find out more about what we do for private credit.

It’s been a long summer already. Surprisingly athletic, too, not just at the Olympics or at the Euros, but very much so at corporate law firm offices across Europe.

That’s partly because dealmaking has been intense over the last weeks despite the summer holidays. But also because private credit is starting to show some very obvious cracks, as debt fund-financed companies come under pressure and debt restructurings are on the rise in Europe, according to 9fin sources.

“We see more restructuring cases now than new business in private credit,” said a lawyer. “There is not a single direct lender that is not affected. But some have been hit harder than others,” they added.

One example in the form of an apparent debt-for-equity swap has surfaced earlier this month involving Germany-based gaming equipment retailer Pro Gaming Group (previously Caseking). According to the website of Germany’s Federal Cartel Office, private credit firm Arcmont Asset Management is looking to take over the business from Dutch sponsor HAL Investments, which acquired a controlling stake in 2021.

According to the company’s latest publicly available financial report for 2022 on Germany’s Unternehmensregister, its sales dropped almost by a quarter that year compared to 2021, when it had already adjusted the terms of its financial covenant. For 2023, Pro Gamers Group expected sales to increase by 15%, but that was as of late April 2023.

Arcmont, HAL Investments, and Pro Gamers Group did not return requests for comment on the matter.

The trend is clear on both side of the pond. In the US, a group of private credit firms led by Blue Owl Capital and Ares Management have just agreed to take over troubled software company Pluralsight, wiping out $4bn that sponsor Vista Equity Partners and other investors had put into the business since they bought it less than four years ago, Bloomberg reported on Thursday 22 August.

What’s surprising about these cases is that they found their way into the public. More often than not, troubled credits and private debt restructurings remain a very well kept secret, especially in Europe.

“There is little talk about this,” said a debt adviser. “There’s the sponsor, maybe one, or two, or three, lenders. Lawyers, sometimes not even financial advisers. People prefer silence over this. But why should there be less trouble in private credit — just because it’s a different capital structure?” rhetorically asked this source.

And there are many troubled companies in Europe these days. The distressed debt market is unseasonably busy. Four of the nine corporate defaults that occurred globally in July happened in Europe, the only region where defaults have exceeded 2023 levels, according to a report from S&P.

Already in May, S&P said that rising global defaults will test debt funds this year. And it’s been clear since March at the latest that private credit restructurings are definitely happening, at least in the US, as reported by 9fin.

Across the Atlantic, private credit defaults increased to 2.7% in the second quarter, in what was a third consecutive quarterly increase in the figure, according to Proskauer’s Default Index.

Earlier this week, US-based moving services company Sirva Worldwide announced it completed a restructuring that centred around ceding ownership to a group of funds included those managed by KKR, Evolution, and BlackRock.

Also in the US, private credit firm Golub Capital took control of vision care platform Imperial Optical, 9fin reported earlier this month.

Europe is next. “Private credit restructurings usually start with a covenant reset, some fresh equity from the sponsor. Then you see whether things are going better within a year or so. But for many, that’s not the case now,” said the lawyer.

“We also see bankruptcies with liquidation and total loss. There are certainly deals where direct lenders pull out and funds have three-digit million euro amounts of total losses,” the lawyer added.

Businesses in the European consumer space are having a hard time because people spend less after many months of high inflation and amid geopolitical risks. In Germany, sectors like fibre cable infrastructure and medical practices are facing problems because of overcapacities and regulation.

“But a few years ago everyone said: We have to do this. There was always a flavour of the day, everyone jumped on it blindly,” commented the lawyer.

So while private credit bankers had been hoping for a deal surge after the summer as M&A activity is set to finally pick up after a slower first half of the year, they might instead get hit by waves of portfolio troubles when returning from Europe’s beaches in the coming weeks.

According to the lawyer, mounting losses in the European private credit space could also hit funds’ ability to retain key bankers and raise new money from investors. The fundraising market has showed a polarisation with large players raising jumbo funds, while smaller have bees struggling, as we showed in our latest European Private Credit Review. Asset management firm Fidelity International has been one of the first one impacted by such trend and this spring let go around 30 staff as it exited European direct lending following fundraising difficulties.

Nevertheless, big names in asset management keep pouring into private credit. US-based Prudential Investment Management (PGIM) is now also raising money for a private credit fund for the large-cap market, reportedBloomberg this week.

It’s also been a busy August for UK take-privates, with direct lenders staging a resurgence for financing them.

9fin this week also took a closer look at the European medtech space, where debt funds are increasingly active amid big investments in the wider healthcare space.

Meanwhile in Italy, Pemberton provided €109m of debt financing to back Tikehau’s acquisition of cable installation company CEBAT from Oaktree.

Pemberton and JP Morgan put together a €300m financing package to support Carlyle’s stake acquisition in Catalonia-based technology consultancy firm Seidor, while Goldman Sachs Asset Management is working with a club of direct lenders to provide around £750m to UK-based sustainability advisory business SLR Consulting to refinance its existing private debt.

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