Loan Note: Why distress may be different in this crisis; the rise and rise of covenant-lite loans

Will the last stage of the distressed cycle go missing? Check out this month's cover story for reasons why it might. Plus, the relentless rise of covenant-lite loans and a new hire for Churchill. Here's today's brief for our valued subscribers only.

They said it

“Most investors report that they are still not taking in-person meetings and most staff are working remotely, while some are forecasting re-opening for ‘normal’ operations at various points over the next nine months”

Taken from a report into the impact of covid-19 on closed-end alternative investing by placement agent Probitas Partners

First look

Will the distressed market be cut off in its prime?

A lot of things have changed in 2020, but one thing hasn’t: investors’ hunt for yield. This explains why alternative assets, including private debt, remain on the radar – and why, at this point in the cycle, distressed debt is attracting plenty of interest (see our October issue cover story on the topic here).

Indeed, we are already part way through the distressed cycle. In the immediate aftermath of the covid-19 outbreak, dislocation on both public and private markets presented some low-hanging fruit which has already been gobbled up. “The easy opportunity is gone,” reflects Robin Doumar of fund manager Park Square Capital.

Currently, we appear to be in what Bev Durston of consultancy Edgehaven describes as “phase two”, where rescue finance for stretched companies in “covid-sensitive” sectors is to the fore. Durston estimates this is an opportunity that could last anywhere between four months and a year.

After that, bearing in mind what has happened in past crises, it could be time for the most lucrative phase of genuine distress, where the juiciest returns of 20 percent or more should be available. However, there is a view that companies that in the past would have defaulted will this time be propped up by extensive central bank support and extremely low interest rates.

Whether these companies eventually topple despite supportive conditions or manage to limp through to recovery will determine whether the final stage of the distressed cycle will be merely extended or largely eroded. The fate of some very large distressed funds could rest on this outcome.

It’s not all about distress…
The moment you’ve been waiting for is here: the opportunity to download our October 2020 issue. Why are music royalties investors poring over back catalogues? Has US government funding missed the mark when it comes to bailing out companies in need? How big are the issues facing the subordinated debt market? And what’s the new approach to net asset-based facilities that’s creating ripples in the fund finance market? Take a look inside to find the answers.

Data snapshot

No covenants, no problem. The chart below shows the enormous rise in covenant-lite loans in recent years. How loans with loose or non-existent covenants perform through the current crisis may shed light on their future viability. For the time being, there is no sign of their popularity decreasing.

Essentials

CLO hire for Churchill

Churchill Asset Management has hired Kelli Marti to fill the new role of managing director and CLO portfolio manager, effective 1 October. Marti will be responsible for the management and growth of Churchill’s mid-market CLO platform, including day-to-day vehicle oversight, assisting in the sourcing of assets and trading strategy development, and participating in fundraising initiatives.

Marti comes from Crestline Denali Capital, where she served most recently as chief credit officer, responsible for overseeing credit underwriting, research and portfolio management activities for the firm’s CLO portfolio.

Roll up…

It’s a big events week for Private Debt Investor, with our Capital Structure Forum and PDI Germany Forum combining to form our Debt Week, which starts tomorrow. You can find out more about how to sign up and about our events in general, here. Coverage of the events will also be found on our website and in future editions of Loan Note.

LP watch

Institution: School Employees’ Retirement System of Ohio
Headquarters: Columbus, US
AUM: $14.52 billion
Allocation to alternatives: 27.1%

School Employees’ Retirement System of Ohio has agreed to commit $50 million to Invesco Credit Partners Fund II, a contact at the pension informed PDI.

The fund invests in the corporate sector through a distressed debt strategy in North America.

The pension fund’s recent commitments are to vehicles focused on the corporate and infrastructure sectors within the Asia-Pacific, Europe and North America regions.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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