Loan Note: Three points of stress for leveraged loans; fundraising fighting to stay on course

Fitch discovers the leveraged loan market adapting to tough new realities. Plus: fundraising bears up well so far; and Monroe launches a new CLO. Here's today's brief for our valued subscribers only.

They said it

“Financial markets are set to stay on edge as concerns that the global economy is heading for a painful downturn prove hard to shake off”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, in a press release from the firm.

First look

That sinking feeling: leveraged loans facing various pressures, Fitch finds (Source: Getty)

Trouble brewing in leveraged loans
A few points arising from Fitch Ratings’ latest European At-Risk Leveraged Credit report.

Lower debt multiples: In the face of economic and market pressures, even better performing European leveraged credits will adjust to lower debt multiples. For issuers with liquidity and maturity headroom, the report predicts “traditional” measures such as cost savings, reductions in capital expenditure and less acquisition appetite. But it also expects to see active liability management in the form of opportunistic debt buybacks at discounted prices as well as asset sales and debt exchanges.

More ‘amend and extend’: For some loans maturing in 2023 and early 2024, a lack of refinancing options coupled with challenging operating and capital market conditions will lead to negotiations between issuers and lenders over ‘amend and extend’ transactions likely to trigger Distressed Debt Exchange criteria. Fitch views a transaction as DDE “if it results in a material reduction in terms, such as maturity extensions or the converting of cash-pay interest into payment-in-kind; and if we deem the transaction is undertaken to avoid an imminent default”.

Defaults on the rise: European leveraged loan twelve-month trailing default rates rose to 1.4 percent in September from 0.9 percent in August, with Fitch expecting a further rise towards 3.0 percent in 2023, largely due to DDEs. TTM high-yield bond default rates in developed markets were below 1.0 percent in September but are expected to rise towards 2.5 percent next year.

Fundraising weathers the storm – for now
It’s an uncertain time for private debt fundraising as investors confront the volatility of the economic and geopolitical climate as well as, in many cases, overallocations to private markets due to the public market turmoil. In addition, there are plenty of LPs that have already made all the commitments they can in 2022 and now have their sights set on next year.

If this adds up to a challenging situation for those with funds currently in the market, it’s not yet coming through in Private Debt Investor‘s fundraising data. Private debt funds globally collected more than $174 billion through the first three quarters of this year, which is very much in line with the averages of recent years and comfortably ahead of the covid-hit year of 2020.

In terms of strategies, 2022 is again giving us few hints of change. It was last year that senior debt strategies significantly increased their share of capital raised, accounting for around 40 percent of the total. This share has thus far been maintained in 2022 as investors continue to adopt a safety-first stance. Distressed debt is not yet showing signs of taking off, though that may be expected to change in the turbulent period ahead.

The third quarter represented something of a revival for fundraising in Europe, which had fallen behind Asia-Pacific in the early months of the year. Beset by economic and geopolitical headwinds, Europe has borne the brunt of investor caution but appears to have started to turn the tide. Europe’s temporary decline has allowed North America to claim an even larger slice of the fundraising pie than it has traditionally held.

While the overall picture is one of normality based on the Q1-Q3 2022 period, it remains to be seen whether this can be maintained as rising rates, surging inflation and war in Europe continue to pose huge challenges for those raising capital.


$500m CLO for Monroe
Chicago-based fund manager Monroe Capital has closed a $502.5 million term debt securitisation known as Monroe Capital MML CLO XIV. The term financing was Monroe’s second new collateralised loan obligation completed in 2022 and is secured by a portfolio of mid-market senior secured loans.

Monroe sold securities rated from AAA through to BB as well as subordinated notes. Monroe and affiliates retained a majority of the subordinated notes in the transaction. BNP Paribas served as lead manager, structuring agent and bookrunner. The transaction was structured to meet and comply with European and US risk retention guidelines.

“We were able to upsize the CLO due to strong investor demand,” said Jeremy VanDerMeid, portfolio manager of Monroe. “Our ability to blend proprietary directly originated dealflow with the traditional middle market syndicated transactions continues to create a unique, diversified portfolio for CLO investors.”

New CEO for Arrow firm in Italy
Arrow Global, the London-based pan-European credit and real estate fund manager, has appointed Daniele Patruno as chief executive officer of its Milan-headquartered firm Europa Investimenti. Incumbent CEO, Stefano Bennati, will continue in his role as chairman of Arrow Global Italy.

Patruno has worked at Europa Investimenti since 2009 and was most recently head of credit strategy. He started his career at Barclays Capital in London. In his new role, he will report to Mark Gollin, managing director and global head, platforms.

Acquired by Arrow in 2018, Europa Investimenti is part of Arrow’s offering in Italy, Europe’s largest non-performing loan market. The business acquires and securitises NPLs and financially restructures distressed or insolvent companies.

LP watch

Institution: Teachers’ Retirement System of the State of IllinoisHeadquarters: Springfield, USAUM: $63.27 billionAllocation to alternatives: 6.7%

Teachers’ Retirement System of the State of Illinois confirmed a commitment of $125 million to Brookfield Infrastructure Debt III, a source at the pension fund told Private Debt Investor.

Founded in 1899, Brookfield Asset Management is an asset manager focused on investing in high-quality assets across real estate, infrastructure, renewable power and private equity. The fund’s predecessor had a final close on $2.7 billion in December 2020.

TRSIL’s recent fund commitments have predominantly focused on the corporate sector in North America.

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