Panelists discuss BDCs and deal terms at New York Forum

Private Debt Investor’s annual New York gathering featured lively discussion from a number of private credit luminaries.

Private debt professionals gathered in New York on Tuesday to hear industry bigwigs discuss the state of the asset class and the issues facing it.

Topics covered at the Private Debt Investor New York Forum ranged from business development companies to the blurring of the large-cap space and mid-markets.

The BDC panel convened in the morning with Joshua Easterly, co-CEO and chairman of TPG Specialty Lending; David Golub, president of Golub Capital;
Howard Levkowitz, co-founder and managing partner, Tennenbaum Capital Partners; and Brad Marshall, senior managing director of GSO Capital and FSIC portfolio manager.

Jonathan Bock, a managing director and BDC analyst at Wells Fargo, led a discussion that ranged from benefits of the structure to expected returns.

Golub said the BDC gives “regulatory cover” for investors, as those entities often are publicly traded, requiring more disclosure than private credit funds. He also noted that BDCs offer tax advantages to institutional investors.

Marshall, though, said that finding a book value of its assets can be subject to debate with some managers more liberal in their valuations than others. Easterly added that assigning a higher asset book valuable might pay off in the short-run but could be detrimental in the long term when it came to raising capital.

Bock asked the audience what investors could fairly expect in returns from BDCs. The majority, 61 percent, said 8 percent or lower was likely, while 31 percent said investors could look for those of 9 percent. The rest voted for BDC returns of 10 percent with no one claiming 11 percent or more could be the norm.

Returns, the panel said, vary by asset class, with junior debt bringing in 12 percent or more and unitranche pulling in 8 percent to 11 percent. Investments in senior secured loans could not achieve returns at 12 percent, one panel member added.

The panel on market convergence featured Peter Atkinson, senior vice-president at GIC; Joe McCurdy, head of origination at Guggenheim Partners; Ian Palmer, managing director and principal of debt & credit investments at PSP Investments USA; and Lukas Spiss, principal at Owl Rock Capital Partners. Bill Brady, a partner at Paul Hastings and head of the firm’s alternative lender practice, moderated the panel.

The men discussed large-cap lending terms being pulled down market.

Spiss noted that private equity sponsors expected two different things when negotiating with lenders who syndicate the loan and alternative lenders that hold the debt on their books. Sponsors have been pushing covenant-light deals, he said, which have more borrower-friendly terms and might be seen in the large-cap space.

When discussing inter-creditor agreements in hybrid deals – where a bank provides senior debt and an alternative lender provides junior capital – Atkinson said his firm might look for inter-creditor terms that are standard in mid-market deals, which may benefit junior creditors.

When asked about the role of alternative lenders in the future, Palmer noted that banks are becoming more inconsistent with their lending, a boon for private debt managers.