Loan Note: Covenant-loose deals in the majority; seeking answers from Greensill

Proskauer dives into its 2020 deals and finds 'covenant-loose' was prevalent in the documents. Plus: Finverity seeks answers to the Greensill debacle and the UK market's swift recovery. Here's today's brief for our valued subscribers only.

They said it

“While it is not clear that the rise in nonbanks and shadow banking has reached the point of systemic risk, this trend is accelerating and needs to be assiduously monitored, which we do regularly as part of our own business.”

Jaime Dimon, chairman and chief executive officer of JPMorgan Chase in an annual letter to the firm’s shareholders.

First look

Loose covenants are still the norm
The pandemic may have changed some things in the private debt market, but what it did not do was usher in a sea change in deal documentation. The newly released Private Credit Insights report from law firm Proskauer reveals that, of 200 deals the firm advised for direct lending clients in 2020, 65 percent were “covenant-loose”, implying relatively little protection for lenders.

The study found that the pandemic did produce temporary changes in the second and third quarters with a decrease in leverage, an increase in pricing and a growth in the number of deals with full financial covenants. However, thanks to a boom in deals in sectors such as healthcare, software and business services, the fourth quarter saw a return to business as usual. These sectors accounted for two-thirds of the direct lending deals Proskauer advised on last year.

Proskauer also found that 2020 was the year of the larger deal, with more than half of its deals involving loans of at least $200 million in size.

The lessons from Greensill
So what went wrong at Greensill, the ill-fated supply chain finance provider that has brought into sharp focus the lobbying efforts of former UK prime minister David Cameron?

Finverity, also a UK supply chain finance firm, has been reflecting on this question in a paper entitled “The Greensill debacle: Lessons for supply chain finance”. Of course, it comes with the caveat that, as a participant in the market, Finverity would be unlikely to identify any existential threat to supply chain finance itself. Nonetheless, the paper makes for a good read.

Among other things, it makes the case that Greensill had too much concentration risk with exposure to just a handful of clients, and also drifted from traditional supply chain finance (short-term exposure to creditworthy buyers) to riskier, long-term structured finance.

Data snapshot

UK’s quick return to normal. A comparison of H2 deal volumes in the UK and mainland Europe reveals a disparity in the recovery of the private debt sector following the covid-19 pandemic. While UK deal volumes in late 2020 bounced back to almost the same level as in 2019, European deals were well down with just 141 deals in H2 2020, versus 217 in the same period of 2019.

Essentials

ReSolve’s new fund for hard-hit firms
UK-based investment and advisory firm ReSolve has launched a new £100 million special situations fund in partnership with RoundShield, a pan-European investment firm. The vehicle will target investments of up to £20 million in businesses which are challenged for a range of reasons, including by covid-19 and Brexit.

New IR hire at Monroe
Chicago-based fund manager Monroe Capital has hired Jayro Yoo as a director based in Texas who will serve on the firm’s marketing and investor relations team. Prior to Monroe, Yoo was a vice-president at DWS Asset Management, where he focused on raising capital for DWS’s alternative investment platform.

LP watch

Institution: Cathay Life Insurance
Headquarters: Taipei, Taiwan
AUM: NT6.95 trillion
Allocation to alternatives: N/a

Cathay Life Insurance has approved a $50 million commitment to Crescent Direct Lending Fund III. The vehicle is managed by Crescent Capital Group and will focus on direct lending opportunities to private equity-backed mid-market companies in the US.

The Taiwanese insurer’s recent private debt commitments have been mainly to senior, subordinated and distressed debt funds focused on investments in the corporate sector across various regions.

Institution: Texas County & District Retirement System
Headquarters: Austin, US
AUM: $35.7 billion
Allocation to alternatives: 49.2%

Texas County & District Retirement System has approved $150 million-worth of private debt commitments in March 2021, according to the recent investment activity report on the pension’s website.

The commitments comprised $100 million to Marblegate Partners Onshore Fund II and $50 million to Alcentra Structured Credit Opportunities Fund IV.

Previously, the US pension fund committed $75 million to Marblegate Asset Management‘s inaugural onshore fundAlcentra is currently in market seeking $500 million of LP capital for its structured credit vehicle.

TCDRS has a private debt target allocation of 29 percent, which currently stands at 24.2 percent.

The $35.7 billion US pension fund’s recent private debt commitments have primarily targeted North American senior debt origination and distressed debt vehicles.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.

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