Bad deals pose bigger risk than credit cycle

Debt funds embracing riskier credits and more complicated deal structures poses a greater risk to the industry than a turnaround in the credit cycle, panelists argued during PDI’s Germany Forum.

 

Despite fears the credit cycle might be about to turn, private debt faces a larger enemy from within – bad deals. That's the view of one panel speaking during PDI 's Germany Forum .

With competition rampant, and pricing coming down, some funds may be forced to deploy capital in credits others might turn away. It's a case of “buyer beware” particularly if funds seem to be offering reasonably high yields.

“If you give money to these direct lending funds which offer 8 to 10 percent, I'd be wary,” said Nicolaus Loos, managing director at IKB Deutsche Inudustriebank. While it's reasonable to be concerned about the turn of the credit cycle, funds aggressively going after credits should alarm investors, he added.

Other panelists noted investors are starting to heed this advice, perhaps aware the credit market may be reaching the top. Andrew Geczy, chief exectuvie at Terra Firma Capital Partners, noted LPs are starting to gravitate away from riskier funds and look to senior debt.

Loos also cautioned against the use of elaborate structuring when funds provide loans. In particular, he criticized the complexity of transactions which involve banks partnering with funds and ranking more senior in the capital structure.

“No one has tested that structure,” he said. “What will happen if there is a default?”