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As Tolstoy didn’t write, all happy companies are alike, but all unhappy companies are unhappy in their own way.

After years of a benign economic environment aided by a generous Fed, troubles in the middle market are bubbling up. The ground below companies is shifting and no sector seems to be safe. For what unites an insurance claims business, a hotel management company, a fishing tackle retailer, and a German dentist beyond the spooky season handing out a harsh reality check.

Take Alacrity Solutions, an insurance claims business headquartered in Indiana. A loss of customers prompted the borrower and lenders to engage advisors. It’s a situation that has seemingly caught Blue Owl, KKR, and Antares by surprise, as each marked the loan close to par at the end of Q2, according to 9fin’s BDC database. Indeed, the company is not yet two years into BlackRock Alternatives’ ownership.

Exactly where the restructuring talks are headed remains to be seen. But even if Halloween is over, the specter of a Plural-fright looms — for lenders will tell you that they don’t want to be in the business of ownership, though they have beefed up their restructuring units for these very occasions.

Troubles are on the horizon for the second lien lenders in Aimbridge Hospitality — as the hotel management company seeks an out-of-court restructuring and aims to raise new capital. Carlyle, Ares, Bain, and Oak Hill hold part of the 2L debt.

Less of a surprise for lenders was Alkegen’s new money financing, which with impending 2025 maturities meant time was running short. So upstepped Oak Hill and Apollo to lead a close to $2bn financing. But the arrangement divided up the margin on a $1.3bn first lien term loan at SOFR+300bps and a non-cash paying PIK facility at SOFR+450bps.

It’s an expensive facility overall, but needs must be met. And in the cases where costs have been a big concern for borrowers, PIK facilities have been a popular option for those borrowers feeling the bite of elevated rates. Perhaps with the Fed expected to cut, such costs should ease up, but in some cases a few basis points may not move the needle. PIK is jokingly called pay if you can for a reason.

Pure Fishing, too, was staring at a near-term maturity. In this case, private credit came to the rescue. The company turned to Monarch Alternative Capital, a firm which focuses on opportunistic and distressed credit, and Silver Point, also a firm with a history of investing in strained loans, for a $750m loan at a rate of SOFR+700bps — 200bps above the private credit market average (documented here in 9fin’s Q3 market report).

The company has been having a tough time as of late, as a Moody’s note reported EBITDA in fiscal year 2023 plunged 60%. A wider margin reflects the risk, but it may be a case of kicking the can down the road should the company not turn a corner.

Over in Germany, Scheu-Dental is looking for a refinancing — but struggling to capture the interest of private credit lenders as the company has failed to demonstrate growth. While the business has not done poorly it is still getting extra scrutiny given the importance of EBITDA expansion with a leveraged balance sheet.

Each situation is a snapshot into the very obstacles faced by private credit lenders and are emblematic of the very situations that does not filter into the aggregated numbers. Proskauer’s private credit default index dropped below 2% — still defying gravity and upending established wisdom in debt markets that defaults should be going up.

The difficulties, as many predicted through the years of private credit’s breakneck growth, are coming to fruition. Lenders are either taking ownership of companies or PIK-ing off debt. But will that translate to the real barometer — losses?

Indeed, regarding, AVAD, a seller of residential security products and its lenders, such as MidCap Financial, went down the road of converting equity into debt — and ultimately realized a loss on the investment.

That deal represents the exception rather than the norm for private credit but there could likely be more similar ones on the horizon. Pushing out maturities or PIK-ing debt may work for private credit firms in the short term, but long-term we may begin to start seeing some unhappiness on the lender side.

Encyclopedia Britannica explores sale off a $40m-plus EBITDA

AVAD’s debt restructuring backed by MidCap

Aimbridge lenders to engage with company on out-of-court restructuring options

Sentinel closes in on NSI Industries buyout with Blackstone-led debt

Pimco set to raise over $2.5bn for specialty finance strategy

Bids come in at over $2bn for Astorg’s Anaqua

The more NAV changes, the more it stays the same

Why PC is getting into home equity loans, or the 2Ls of resi mortgages

Private credit M&A bolt-on tracker — October 2024

US Private Credit Review Q3 24 — Deal count climbs, margins tighten

Encylcopedia Britannica — Bank of America has been brought on to advise on the sale of the $40m-plus EBITDA company.

NSI Industries — the maker of electrical and HVAC products is close to a sale to Sentinel Capital Partners, which is set to be funded with a $1.2bn private credit financing package

Accupac — owner Palladium Equity Partners has tapped Piper Sandler to explore a $200m refinancing for the cosmetic contract development company

Anaqua — Bids are in for the intellectual property software service provider, with five firms offering north of $2bn. An $800m debt package is being talked about

Midwest Transit Equipment — the BrightWater-backed distributor of new and used buses is exploring a sale with the help of investment bank Harris Williams

Lycra — The spandex maker is approaching opportunistic credit funds for a $350m debt deal, partly refinancing the company’s existing facilities

Amerit Fleet Solutions — the Brightstar-backed maintenance provider for delivery vehicles is exploring a potential sale with the help of advisors Moelis & Company

State Street says it is ‘shopping’ for a private credit manager (FT)

Wall Street rejoices as the bell tolls for Biden-era regulation (FT)

Generali said to weight deal for credit investment firm MGG (BBG)

BlackRock readies $1.3 billion private credit continuation fund (BBG)

Public pressure on private credit grows with loan sizes (Axios)

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