Loan Note: Moulton warns on debt, Bridgepoint swoops, EBITDAC is back

Jon Moulton warns on debt levels and makes the argument for a new industrial strategy. Plus: Bridgepoint takes over EQT credit arm, more examples of revenues ignoring coronavirus impact, and danger signals in CLOs and real estate.

They said it

“It is imperative that all Americans see the recent events as a call for action and work to ensure equality for people of color. I pledge that Oaktree and I will heed this call and listen, learn and act”

Oaktree Capital Management co-founder and co-chairman Howard Marks in his latest memo, reflecting on the death of George Floyd and the response required

First Look

‘Every reason to be concerned’

John Moulton
Moulton: be afraid

For private capital professionals of a certain age, the image of Jon Moulton, pioneer of UK private equity, answering questions from a UK government select committee will be a throwback to 2007. Back then, Moulton and other prominent buyout execs faced questions from suspicious politicians about PE, wanting to know a) what it was up to and b) whether it needed to be taxed more.

Things were different at yesterday’s session; Moulton was giving his view, alongside ‘BRIC’ economist Lord O’Neill and Adam Marshall, the director general of the British Chamber of Commerce, on the economic fallout from the coronavirus. Moulton has always had a thing for debt (remember the animated ad he took out at Piccadilly Circus?), and corporate debt was very much on the agenda. “The scale of the problem is going to be enormous,” he said about the ability of companies to repay government rescue loans. “There will be a lot of rescheduling of debt, that’s clear. There is every reason to be concerned about it.” Raising a point obvious to some, he noted that corporate bankruptcies will rise “quite sharply in the course of the next year, and may persist into the future, depending on the strength of the economy and interest rates.”

Lord O’Neill had his own thoughts on the government’s loan schemes: “I’m a huge fan of the furlough scheme, but I personally would not have approached the company support scheme through debt provision […] I would have had an approach that was more grant-based and tying it very close to the furloughing for a two- to three-month period; and, for those that really needed it for a longer period, considered an equity injection rather than this very wide scatter-gun debt approach, because I can’t imagine how that many companies are going to be able to pay a lot of it back.”

Also on the agenda was how this crisis should spawn a new government-owned investment initiative akin to either the UK’s CDC Group or Singapore’s Temasek. Said Moulton: “I’m a fan of doing some industrial strategy. It ain’t working the way it is; productivity’s going nowhere.”

Bridgepoint acquires EQT’s passion for credit

“Passionate about credit” is the concluding sentiment in a video still hosted on the EQT website here. It has sat a little oddly since January this year, when the firm announced that EQT Credit was the subject of a strategic review, with EQT having decided that the business was non-core to its main activities. For Bridgepoint (owner of Private Debt Investor’s parent, PEI Media), the acquisition of this well-established business gives a big boost to its existing debt activities by AUM, strategy and geography. For more details, read John Bakie’s account of the deal here.

EBITDAC is back

More examples of companies seeking to replace their troublesome 2020 EBITDA figures with those from last year in this Financial Times article (paywalled). Read our report here on how the European Leveraged Finance Association had sought to halt the then-nascent ‘EBITDAC’ practice in its tracks when the first example came to light. Seems like ELFA may not have succeeded in holding back the tide. 

Red light warning for CLOs and real estate

Even the safest bets in collateralised loan obligations are starting to show signs of strain, with an increasing number of triple-A tranches in the $800 billion market for CLOs tripping their overcollateralisation tests. From 3 February to 28 May, S&P Global downgraded 71 percent of the ratings on CLO collateral, which will continue to pressure all levels of the capital stack. And earlier this year, as PDI noted, Fideres projected the default rate on CLOs would jump to 15 percent in 2020. That’s nothing to sneeze at. See Robin Blumenthal’s assessment of the CLO market here.

Meanwhile, data on the US commercial mortgage-backed securities market, a good indicator of the state of US real estate debt more broadly, have caused concern. In May, Fitch Ratings reported that the CMBS delinquency rate had ticked up to 1.32 percent in April following 12 consecutive months of decline. In early April, Fitch made the morbid prediction that the rate could peak at around 8.75 percent by the end of the third quarter. That would not be far from the July 2011 peak of 9.01 percent. Read more on this piece from our Real Estate Capital colleagues here.

Data snapshot

Government pushback for larger firms. The UK government’s coronavirus support schemes have been generous to small businesses but larger firms appear to be struggling to access cash. The three schemes – BBLS, CBILS, and CLBILS, which respectively focus on micro businesses, small to medium businesses and larger firms – have collectively extended more than £27 billion to companies, according to figures from the British Business Bank, which manages the schemes.

Essentials

Owl Rock’s $5m for businesses in need

A direct lender doing its bit. New York-based Owl Rock Capital Partners has set up a $5 million community loan fund with its own capital to extend interest-free loans to US-based small businesses “with an emphasis on minority-owned businesses impacted by covid-19 and other economic and social crises”.

Keep pointing us to the stars 

We get the message – there’s plenty of emerging talent in the private debt world. Entries have been coming in thick and fast for this year’s Rising Stars list, but there are still two weeks to make further nominations. For details see here.


Today’s letter was prepared by Andy Thomson with John Bakie, Robin Blumenthal and Adalla Kim


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