Loan Note: Growing concern over payment holidays, LBOs driving defaults

Borrowers who have taken payment holidays due to coronavirus could face big bills as lenders ask them to catch up. We also take a look at why LBOs are making up more than half of all firms in default. Here's today's brief for our valued subscribers only.

They said it

“The banking industry will continue to work with the government ensuring the flow of credit into the economy and supporting those businesses who are still feeling the effects of the pandemic”

Australian Banking Association CEO Anna Bligh commenting on the Australian government extending the Coronavirus SME Guarantee Scheme until 30 June 2021.

First look

Watch out for payment holidays

Many lenders have offered payment holidays to selected borrowers as part of supporting measures for the coronavirus-affected economies. Regulated lenders in certain jurisdictions of the Asia-Pacific region were required to offer the repayment deferrals to eligible borrowers.

Similar to what Bama Balakrishnan, Northern Arc Capital’s chief operating officer told Private Debt Investor, the repayment deferrals and moratoria had made it harder for lenders to gauge the expected asset quality.

As these special treatments are mostly postponing debt payments, industry observers suggest the length of the payment holiday may be a risk factor for both lenders and borrowers. It is because, in many cases, interest charges continue to accrue while borrowers defer loan repayments.

Read more about it here.

Defaults rack up for PE firms

Research from Moody’s found that 60 percent of second quarter defaults were from private equity-backed firms affecting more than $13 billion of leveraged loans. The spike in defaults, which has exceeded the total tally for 2019 during only the first six months of 2020, is not a major surprise given the huge business disruption caused by government moves to contain covid-19.

Total defaults among US speculative-grade companies increased to their highest in a decade in June at 7.3 percent. However, the bad news is unlikely to be over according to Moody’s with defaults expected to continue rising to around 12.4 percent in the first quarter of 2021. Private equity ownership of speculative-grade companies, considered B3 negative and lower by Moody’s, has increased to 70 percent, up from only 45 percent during the global financial crisis.

Read more about it here.

Data snapshot

Default levels growing

Admin services provider SRS Acquiom noted a rising proportion of direct lending portfolios are in default between June and July. Its latest distressed debt and direct lending Barometer saw the proportion of firms with between 25 and 50 percent of their portfolio in default rise to 33 percent, meaning more than half of funds surveyed have at least 25 percent of their portfolio in default.


MVC Capital to merge into Barings BDC

Business development companies are consolidating, with Barings BDC and MVC Capital announcing they have agreed to a $177.5 million cash and stock deal in which MVC Capital will be merged into and externally managed by Barings BDC. The combined company is expected to have more than $1.2 billion of investments, pro forma. Based on Barings BDC’s 30 June net asset value, the transaction, which is expected to close in the fourth quarter, represents a book value consideration of $10.01 per fully diluted share of MVC Capital. That is a 21% premium to MVC Capital’s closing price of $8.21 a share on 10 August, the day the deal was announced.

LP Watch

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $35.23 billion
Allocation to alternatives: 0.4%

Connecticut Retirement Plans and Trust Funds is looking to add to its roster of private credit managers, according to materials from the pension’s August investment advisory committee meeting. One potential manager under consideration is Fortress Investment Group, which is offering a SMA-structured partnership. Connecticut recently agreed a similar partnership with Goldman Sachs following a consideration outlined at Connecticut’s July investment meeting.

Institution: Employees Retirement System of Texas
Headquarters: Austin, US
AUM: $28.30 billion
Allocation to alternatives: 30.0%

Employees Retirement System of Texas has agreed to commit $125 million to Balance Point Capital Partners V, a contact at the pension informed PDI. The fifth flagship fund by Balance Point Capital is a mezzanine debt fund that focuses on investing in corporate sector.

Today’s letter was prepared by John Bakie with Robin Blumenthal and Adalla Kim.

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