I recently chaired a panel discussion at the Private Debt Summit at the SuperReturn International conference in Berlin. My fellow panellists and I had a wide-ranging conversation on how both private credit and sponsors are responding to capital structure challenges across Europe and the US, covering the following topics:
A&E discussions - the lender ask
To start, the panel spoke about what lenders typically expect to see from sponsors and portfolio companies in return for providing additional runway, highlighting how the requirements or 'shopping list' can vary based on the quality of the credit.
Sponsor new money
We explored the willingness of shareholders to inject new capital into stressed and distressed portfolio companies, and the factors influencing this decision, including the size of the investment relative to the fund, the fund's current status, liquidity needs, and the overall business outlook.
Insights were shared on how panellists are seeing sponsors participating, whether through pari passu, subordinated, or senior debt structures. We also touched on equitable subordination and how structuring sponsor new money as senior or super senior debt can provide extra leverage in a restructuring or enforcement scenario.
Enforcement – current themes
The discussion moved onto the recent shift away from the loan-to-own strategy among distressed-focused credit funds, with funds increasingly broadening their mandates and prioritising collaborative capital approaches. However, when all other options have been exhausted, it was agreed that we still see lenders stepping in to take the keys. Panellists shared whether they had been involved in enforcement situations recently and whether they saw it as a tool of last resort.
We opened up the conversation to discuss how ease of enforcement, and the relevant restructuring framework in different jurisdictions, informs the panellists' investment decisions.
We have recently seen situations where the sponsor has walked away from the portfolio company. The panel gave their thoughts on why sponsors might choose to do this, with driving factors including the returns already achieved, preserving relationships with lenders and the market, reducing ongoing liabilities, and reallocating resources to more promising assets.
NAV lines
NAV lines secured against the net asset value of a portfolio have drawn increasing attention in recent times. The panellists discussed situations where the sponsor has had NAV facilities and what the impact of a defaulted portfolio company could be on those facilities and the broader portfolio.
Liability management
The panel shared their views on how creative liability management techniques from the US, such as drop-down financings and up-tiering deals, are starting to impact European investment strategies and how the risks and opportunities they provide could affect their decision to invest. We considered approaches to document flexibilities for large-cap and mid-cap situations, sponsor appetite to using LM technology in a European context, and how lenders are defending against liability management deals in the US.
The role of private credit
Finally, we considered the evolving role of private credit, whether it is really competing with banks' underwrite and distribute models, and how these products could potentially complement each other. The panel shared views that both private credit and broadly syndicated transactions can co-exist. Whilst private credit will continue to dominate the sub €300 million space, in large cap transactions both financing products are complimentary. In the large cap space, more deals are expected to emerge with both financing sources being part of the same credit documentation.
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