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Private Credit 

David Brooke

This article is part of our new service, 9fin Private Credit. If you're interested in a free trial, contact subscriptions@9fin.com

There are few things as disorientating as a temporary return to the Summer in late October. Cocktails in 80-degree Miami weather will fluster you in more ways than one!

But I’ve just returned from ABS East, and if you were there you may have been able to catch a panel that I moderated on private credit dealmaking.

The opening morning was devoted to private credit — and from the audience attendance you could see why. When I put it to Scott Rosen, a partner at Ares, on the panel whether it was the golden age or golden moment of the asset class, he didn’t hesitate to state it was the former. 

A few have been more coy, and called it a golden moment in conversations with me, but when does a moment become an age? It feels like private credit is now a few years into being the fashionable asset class.

Yet while everything asset-backed had its literal time in the sun the last few days, it is certainly a moment for asset-based lenders in the more figurative sense. For what we typically think when we hear private credit — corporate direct lending — is merely a synecdoche: for those further enmeshed into the market, ABL is a flourishing product. As one ABL professional told me: “While we’ve in the eight or ninth inning of direct lending, we’re only in the second or third for ABL”.

In his keynote speech Brett Leas, co-head of asset-backed finance at Apollo, said LPs are increasingly discovering asset-backed private credit financing strategies. Perhaps they might all be tapped out traditional corporate direct lending strategies?

“ABF is a real diversifier. The level of customization is really high…it’s highly under penetrated by institutional markets”.

Indeed, few may still not know how large the asset financing universe is: ranging from hard assets, such as real estate and planes to mortgages to financial assets such as inventory and receivables. 

Nevertheless, asset-focused private credit strategies may never become the juggernaut direct lending now is. Existing players say the barriers to entry are higher with teams usually bigger than those in corporate direct lending and banks still having a comparatively stronger presence in the market (even if it that dominance is receding).

It’s a market that is tough to scale, so institutional investors may find the number of available managers limited.

The paradox of a recession is that it is a lived reality before you can confirm it to be true. It is only when the quarterly GDP figures are released can we truly believe what we collectively went through.

We don’t need to remind you of the various recession predictions and indicators out there, but recent note from EY-Parthenon suggests that real GDP growth in the third quarter was above 5%. We’ve failed to talk ourselves into a recession it seems! The note goes on to state that this is likely unsustainable, but it’s remarkable reversal from many of our expectations (even if GDP can be a flawed measure).

Similarly, what measuring indicators we have on the private credit market are showing a rosy picture. Proskauer’s Private Credit Default Index indicated that the overall default rate for the third quarter was 1.41% — a decreased from the second quarter (1.64%), which in turn was a a decrease from the first quarter (2.15%).

“In the face of tremendous economic and geopolitical headwinds, private credit remains resilient,” said Stephen Boyko, a partner in Proskauer’s Private Credit Group.

The breakdown of Proskauer’s figures show a significant decline in the default rate for companies with an EBITDA of $25m or below — dropping to 0.7% from 2.1%.

Does that mean smaller businesses are faring better under somewhat tricky conditions? Typically, loans to these companies have tighter covenant packages, which you’d imagine would be easier to trip in a difficult situation, and therefore will show a higher default record. Exactly what is going on is hard to tell.

But even if defaults grew at the higher end of the market — to 2.5% for companies with an EBITDA between $25m-$49.9m and 1.2% for those with an EBITDA with a $50m or above — private credit funds have the habit of keeping difficulties behind closed doors. 

Although when eventually thrown open, Fortress and Blue Owl will be waiting in the wings as 9fin reported. Fortress is raising $8bn for its credit opportunities fund; Blue Owl $2bn. 

If the leveraged buyout is the foundation for private credit, then the add-on is the fuel. 

We reported earlier this year that the slump in new platform activity meant add-on activity had become elevated. For sponsors know that there is no standing still with portfolio companies: you either find a buyer or be the buyer of smaller companies to bolt on.

Earlier this week, 9fin reported that AmeriLife secured a $250m delayed-draw term loan. Blackstone and Crescent were among those teeing up the facility. And EIS, a distributor of electronic components, doubled its own debt size in turning to Kayne Anderson and Oaktree for a $150m loan mixed between senior and mezzanine facilities. Use of proceeds on both was to fund acquisitions.

But it isn’t just add-ons, for there are signs of LBO activity are out there. Potter Electric Signal Company, a company owned by Gryphon Investors, is on the block at a $60m LTM EBITDA. Quite what the fire and life safety products eventually fetches for remains to be seen.

There is, however, a third option for private credit funds: the recapitalization. Instead of a sale, private equity firm Stellex Capital Management, is moving auto parts recycler Fenix Parts into a continuation fund. In the process it is seeking roughly $300m in debt from private credit funds.

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