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9 quotes from 1 episode on Private Equity Funcast, each with a timestamped link to the source.
William Tuck Hardie states that private credit defaults stay artificially low because lenders and sponsors are fundraising and refuse to mark down bad deals. Direct lenders lack the staff to run struggling companies, so they leave wiped-out sponsors in charge and block their cash management fees.
Lenders block struggling sponsors from collecting cash management fees during restructurings even while those fees accrue on paper.
“They might accrue 2% on the LP's value, but I can promise you the lenders aren't letting anybody pay those sponsor fees in cash.”
Financial professionals consider it a failure if outsiders discover a bad deal, driving the market to simply delay consequences.
“And so if you find out about it, odds are I didn't do my job. So people kind of hold their nose, close their eyes, and kick the can down the road.”
Capital supply levels dictate how many flexible terms borrowers can secure in their credit documents.
“The market determines whether those holes will exist or not…”
From Lender Co-Op Agreements Are Halting Sponsor Priming Plays
Firms bought companies at high multiples and loaded them with floating-rate debt they can no longer afford. William Tuck Hardie notes that because credit and equity funds are actively raising capital, neither side will accept a permanent loss on these deals.
“Most of the time, it's a business that was bought at too high a multiple with too much debt that the cost of that debt is too high as a result of the current interest rate environment. And people don't want to realize a permanent capital loss by putting the business up for sale and realizing that it's not going to sell for 100% of the debt and or any of the equity that was invested in it.”
“The reason for the relatively small percentage of capital E, capital D events of default and thus bankruptcies is really the dynamic that we've been talking about which is that the credit funds are fundraising, the equity funds are fundraising and nobody wants to find out how bad a deal they have on their books.”
Private credit firms keep original owners in charge of troubled assets rather than taking the keys. William Tuck Hardie explains that lending teams simply lack the headcount and operational staff to manage day-to-day business turnarounds.
“The participants in the private credit lending community really aren't set up organizationally in terms of the type of people that work there or the number of people that work there to manage companies on a day-to-day basis…”
Lenders learned that liability management exercises created clear winners and losers. William Tuck Hardie observes that multi-lender pacts now appear in almost every syndicated loan headed for trouble to prevent sponsors from stripping collateral.
“What's happened since the LME balloon blew up is a couple things. One is the creditors have all figured out that it was a zero sum game and there were winners and losers and they've kind of banded together. The evolution of the co-op agreement, which nobody had ever heard of three years ago, is now prevalent in most if not every multi-lender syndicated loan that is headed for trouble or in trouble.”
From Lender Co-Op Agreements Are Halting Sponsor Priming Plays
Some investors build their entire strategy around rejecting creditor alliances. William Tuck Hardie states that these holdouts stay away from the negotiating table specifically to strike bilateral deals for their own benefit.
“There's still obviously the opportunity for somebody who's not at the table to take advantage of the covenant flexibility that a borrower might have…”
From Lender Co-Op Agreements Are Halting Sponsor Priming Plays
“…there are folks whose business models are I'm not going to sign the co-op agreement and I'm going to play the game the way it's supposed to be played, which is for my own benefit as opposed to signing the co-op and pledging allegiance to the group.”
From Lender Co-Op Agreements Are Halting Sponsor Priming Plays
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