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Private Credit 

David Brooke

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL. Sign up for the inside track on this fast-growing market.

Hello and welcome to the final Unicrunch of the year! We have a bumper edition this week for you as we attempt distill all of the biggest developments in 2024 in one article. Along the way we’ve linked to the 9fin reports and analysis that we published as it all played out. Think of it as a big ICYMI for 9fin private credit.

In the meantime, the US private credit team of David Brooke, Shubham Saharan, Peter Benson, Anna Russi, and Elijah Jackson wish you a happy holidays! See you in the new year.

The late Queen Elizabeth II famously called 1992 her annus horribilis. Divorces, affairs, and fires made for what was a terrible year for the monarch. But can this year be said was the same for private credit?

Perhaps that might be a dramatic claim, but after years of riding a wave of low interest rates and ever expanding opportunities for deal making, 2024 was the year it felt the breaks were put on. The “golden age of private credit” that was said everywhere late last year has seemingly been retired (although you can still get the mug).

While elevated base rates led to higher yields for private credit firms, the cost burden on the borrower eventually took its toll well into this year. Soon we were seeing liability management exercises (LME) emerge in the private credit market. And then there were the regulators who for years have been a looming threat, but at best a ghostly presence, finally showed some teeth.

It wasn’t all bad news, however. Funds continued to get bigger and private credit firms, despite a big bank offensive, were still able to win deals. So below are a selection of 9fin pieces that encapsulated a dramatic year for the market.

Pluralsight, an education software company, was acquired for a hefty $3.5bn by Vista in 2021 in the times when private credit seemingly ruled the world. Providers of the $1bn-plus debt for the company were a who’s who of private credit — Blue Owl, Goldman Sachs, Benefit Street, Golub, BlackRock. Ares, and Oaktree.

What the situation did, however, was puncture the key narrative of private credit — that it is built firmly on good relationships with sponsors. When companies face hardships, private credit lenders (with the backing of stronger documentation than banks have) say they can get round the table early with a sponsor and confront the issues outside court and in the boardroom.

A little less so here. When in May it emerged Vista was attempting to complete a transfer of its IP assets into a subsidiary, that aggressive move reverberated across the market. Lenders subsequently organized and engaged Davis Polk, 9fin’s Shubham Saharan reported at the time. The LME was understood to be the first of its kind in the private credit market.

Eventually ownership of Pluralsight was transferred to the lenders, in a move not favored by private credit who prefer to be lenders than owners (though they’ve certainly staffed up for such possibilities).

For more on the debacle read 9fin’s deep dive on the issue here.

To continue the theme of ownership, 9fin reported on a number of situations where private credit firms are going to be tested on their business managements skills.

Imperial Optical, an eyecare service provider, was taken over by Golub, the lender reported in its Q3 earnings call in August. This followed a failure to find a buyer for the distressed asset after, according to Golub BDC COO Matthew Benton, “the company ha[d] been underperforming our expectations and the sponsor’s expectations for some time”.

Lenders including Pinebridge, Goldman Sachs, Maranon, and Comvest assumed majority ownership of Specialty Dental, 9fin reported in May. “Too much M&A” was the diagnosis for the company, where costs had gotten too high and ultimately meant the company tripped a payment default.

In November, 9fin reported that MGG and Ontario Teacher’s Pension Plan took over KLDiscovery, a data management software company reporting a LTM EBITDA of $60m. Following the transfer, a $200m convertible note provided by both parties was converted into equity.

Distress was indeed the watchword for private credit. What is in store for insurance claims management service company Alacrity remains to be seen. But it kicked off restructuring talks after the BlackRock Alternatives-owned company hired Evercore, Centerview, and Alix Partners, while some lenders engaged FTI, 9fin reported in October.

For too long many pundits have decried the lack of regulatory oversight of private credit. A number of bodies have had their say, as well as US Senator Elizabeth Warren, on the matter.

This year, however, we saw the OCC weigh in. In October, 9fin reported that MUFG’s leveraged lending and private credit operation was barred from lending for four months. The OCC had deemed MUFG’s risk rating methodology on individual loans and the monitoring of outstanding loans not good enough. Thus, the institution was required to get its house in order.

Now MUFG is a banking institution, but it announced the launch of its private credit operation back in 2022 and the institution does provide direct loans like any other private credit firm. But as it tries to grow the operation, the worst situation it can be in is to not be available to sponsors in a highly competitive market. MUFG has tried to find an edge in the market in attempting to establish a partnership with Evolution Credit Partners.

President-elect Trump is not a fan of regulation. But as 9fin reported, that deregulation could mean a freeing up of bank operations to lend more aggressively again. The landscape could shift back in favor of the banks.

It is a truth universally acknowledged that any large asset manager must be in want of a private credit firm. Some have tried setting up their own, but as we’ve found at 9fin it may be better to buy one. BlackRock’s purchase of HPS is just the latest one (and maybe the biggest in private credit history).

There is, however, a third way. In March, Corinthia Asset Management, with the backing of Nomura, pulled over 20 members of the Barings private credit team. Longstanding veterans of the middle market lender such as Ian Fowler and Kelsey Tucker made the move and were subsequently named in a lawsuit filed by the Charlotte-headquartered firm following the upheaval.

It wasn’t good timing for Barings, which was in the process of attempting to raise $3bn for its fifth global private credit fund, 9fin’s Peter Benson reported in March. 9fin also reported at the time that the investor Fresno County Employees’ Retirement System was reviewing the key-person clauses in its contracts with Barings. A number of major investors later reviewed the key-person provisions in September, 9fin reported.

The dispute is still ongoing, but that has not stopped Corinthia kicking off its operations. (Do read 9fin’s interview with Mark Wilton, head of European investments here, who discusses the firm’s prospective fundraising and dealmaking strategy.)

It was a move that left us here at 9fin scratching our heads. Insurance brokerage Higginbotham sought a $475m add-on loan from private credit firms at a pricing of SOFR+475bps.

Half of the proceeds was to be used to pursue acquisitions, but what was unusual was that the other half of the money was to be used to cover the interest payments on the existing debt.

So synthetic PIKs were born (although of course there is nothing new under the private credit sun, so do get in touch if you know a situation that the use of proceeds for an add-on loan was used before). It also didn’t stop the company later on asking its lenders KKR, Morgan Stanley, Apollo, New Mountain, Golub, and Ares to cut the pricing on the existing debt by 100bps.

In a deeper dive on the trend, sources were quoted saying it could be a case of a struggling company avoiding (maybe temporarily) a larger balance sheet overhaul and an opportunistic lender wanting in an attractive asset. For some the whole exercise is “unnatural”.

But for more on synthetic PIKs, please do listen to 9fin’s podcast discussion on the topic.

Blackstone-backed Trilliant switches to private credit in latest refinancing

The tide is turning for BDCs, Moody’s data shows 

Beauty and the balance sheet — Private credit firms rush to give BPC companies a makeover

One Call sounds out investors for potential refinancing effort 

LP Wrap — Pensions seal $6.5bn of allocations in year-end spree

One Call — private credit firms are being called up to refinance the healthcare coordinator’s $1.3bn public debt. The company currently has backed from KKR and Blackstone

Databricks — the AI tech start up is in the market for a $2.5bn loan. JP Morgan is reported to be leading the financing

Neptune Retail Solutions — after first sounding out the BSL market, the retail advertisement company is turning to private credit for a $675m debt package

Frazier & Deeter — the accountancy firm is being marketed on a $20m LTM EBITDA and is proving to be a popular asset as sponsors are bidding up to 15x

Honeywell’s PPE unit — while banks are taking care of the debt financing, a separate $400m preferred equity tranche seems perfectly suited for a private credit firm

Triumvirate Environmental — the waste management services company is in talks with direct lenders to fund a potential sale, which is looking to close at a 13x multiple of its $100 EBITDA. Raymond James has been hired to run the process

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

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

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, to partly refinance 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

Prospect’s Private Credit Fund Gets Second Downgrade to Junk (BBG)

Asset-based finance expected to drive private credit growth — Fitch Ratings (P&I)

Why private credit is shrinking as it booms (RTRS)

Sixth Street Inks $4 Billion Deal for Affirm Consumer Loans (BBG)

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