Loan Note: The growth of ‘super senior’; covenant breaches on the up

Thought senior debt was the safest part of the capital structure? Why you may need to think again. Plus: a Lincoln International report suggests an uptick in covenant breaches; and the latest from the hiring frontline. Here's today's brief for our valued subscribers only.

They said it

“There is now clear evidence that the cure for the economic woes of covid – overstimulating the world – has created a much bigger problem to deal with”

Taken from Värde Views, a credit market update from fund manager Värde Partners

First look

Pushing aside senior debt
Is senior debt really senior? It may sound like an odd question, but it’s one that’s being asked more often as a result of so-called “priming” in the European leveraged finance market.

The “priming” trend has been noted by S&P Global Ratings, which in an article published earlier this week – The Shifting Seniority of Senior Debt (registration required) – described how some senior debt holders are discovering they’ve lost their priority status in the capital structure due to the introduction of new “super senior” debt.

The implications can be serious since a large tranche of super senior debt above the senior debt “is likely to materially reduce the amount of cash that senior debt holders recover” in the event of a default.

This is a potentially significant issue with default rates likely to rise. Senior debt recovery rates in Europe have traditionally averaged about 73 percent, with the US figure at 79 percent. In recent US examples of super senior debt, the amount of debt introduced ahead of the original first lender was 21 percent of the total debt structure.

Despite anecdotal reports of senior debt holders being taken by surprise, S&P points out that in most cases pre-approval for the introduction of super senior debt is contained in intercreditor agreements.

Covenant breaches edge up
In a sign of borrowers coming under greater pressure – and lenders perhaps being less willing to overlook issues – a new report from Lincoln International finds that private credit covenant breaches have ticked up in Europe to 2.06 percent in the first half of 2022. This compares with 1.34 percent in the second half of last year, 0.9 percent in the first half of 2021 and is higher than the three-year average.

Aude Doyen, head of UK debt advisory at Lincoln International, said that lenders were prepared to agree waivers during the worst of the covid pandemic, but may now be running out of patience and seeing issues as more fundamental. She also noted that restructuring professionals were slowly getting busier, adding to the sense of stress building in the system.


Two offices, two hires for Warwick
Warwick Capital Partners, a UK-headquartered special situations investment firm, has expanded its presence in the US, opening two offices and appointing two partners.

The firm has $2.5 billion in assets under management deployed in the firm’s closed-end flagship funds, mainly focused on European special situations, and specialist funds investing in thematic opportunities across the US and Europe. As Warwick expands in the US, it has opened offices in Stamford, Connecticut and Houston, Texas.

Warwick has also appointed Leland Hart and Andrew Welty, who will be jointly responsible for overseeing investing and business activities in the US, working closely with founding partners Alfredo Mattera and Ian Burgess.

Hart joins from Alcentra, where he was co-chief investment officer and sat on a number of the firm’s investment committees. Welty has worked as a consultant to Warwick for 10 years, supporting its investment activity and business development.

Four newcomers at Pemberton
Pemberton, a London-based pan-European credit manager, has appointed four new senior hires across its offices.

Anders Svenningsen joins as managing director and head of business development for the Nordics in Copenhagen, where he will be responsible for Pemberton’s Nordic franchise and investors. He was formerly head of Nordic and Dutch markets at Citigroup, responsible for the client franchise in the region across all market business and products.

Christoph Polomsky will be based in Frankfurt as managing director in the business development team for the DACH region covering institutional clients in the region. He joins from Nomura, where he was a managing director, leading the solutions team in Frankfurt. He worked on bespoke investment solutions.

James Taylor, based in London, joins as head of investor relations leading investor communications, reporting and onboarding across Pemberton’s strategies. He has more than 10 years’ experience in IR, holding senior roles at Securis Investment Partners, Spinnaker Capital Group and Brevan Howard Asset Management.

Sally Tankard moves to Pemberton’s CLO team after it was announced in March that Rob Reynolds had been appointed to lead the strategy. She will serve as a director, responsible for the analysis and selection of leveraged finance assets for Pemberton’s CLOs. Prior to joining Pemberton, Tankard was a consultant at Hornblower Business Brokers.

Churchill closes its first CFO fund on $700m 
Churchill Asset Management has closed its inaugural collateralised fund obligation on $700 million. The fund will invest across Churchill’s flagship private capital strategies, including senior lending, junior capital, equity co-investment and private equity fund commitments.

The transaction “provides investors a unique opportunity to access the full array of Churchill’s private capital investment capabilities”, Christopher Freeze, Churchill’s head of investor relations, said in a news release. He said the CFO fund received “outstanding support” from existing and new investors.

A collateralised fund obligation is a structured form of asset-backed financing similar to a collateralised loan obligation, where the debt issuance is supported by a pool of LP interests rather than pools of traditional loans.

Churchill is an investment-specialist affiliate of Nuveen, the asset manager of TIAA. Based in New York, it has $38 billion of assets under management.

Private debt push for IQ-EQ
IQ-EQ, a European investor services group, has appointed Stefan Rolf as global head of securitisation and private debt, a newly created role signalling the extension of IQ-EQ’s service range in the space.

Rolf brings more than 25 years of financial services and banking experience, having held a series of regional and global leadership roles including with ING Bank and Volkswagen Financial Services. In his new job, Stefan will head IQ-EQ’s securitisation and private debt offering, leading the expansion of the group’s global footprint in these areas.

LP watch

Institution: Border to Coast Pensions Partnership
Headquarters: Leeds, UK
AUM: £21.72 billion ($25.9 billion; €25.4 billion)
Allocation to alternatives: 13.8%

Border to Coast Pensions Partnership has approved $817.3 million in commitments across five private debt vehicles, according to a press release issued by the retirement fund.

These mark the completion of the pension’s £5.7 billion private markets programme, which launched in June 2021.

The commitments comprised $220 million to Brookfield Real Estate Finance VI, $132 million to Ares SSG Capital Partners VI and $219.55 million to BlackRock European Middle Market Debt Fund. A further $246 million went to HPS Core Senior Lending Fund II and $172 million to KKR Asset-Based Finance Partners.

The £21.72 billion UK public pension’s recent private debt commitments have focused on senior debt strategies in companies across North America or globally.

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