The ripple effects of covid-19

We sought the views of asset class professionals about the ways in which the crisis is shaping private debt.

With around five months having passed since the pandemic began ravaging many European countries, we considered it a timely moment to assess how private debt is being transformed. To do so, we spoke with 10 professionals. Below are a few examples of what they told us.

Abhik Das, managing director and head of private debt at Golding Capital Partners, on how private debt funds are an increasingly compelling alternative to the broadly syndicated loan market:

“Market observers will argue that the price developments in liquid global financial markets are not sustainable. What is likely to be enduring is the diminishing underwriting capacity of banks. This has been true for businesses in the mid-market for a while, but it is also affecting companies in the upper mid-market – those that would typically have had access to the global leveraged loan or high-yield bond markets.

“The hurdle for new issuers, especially smaller ones with no history in the broadly syndicated leveraged finance market, is higher. Unfortunately, market participants cannot wait for the leveraged loan markets to open up. This is where private debt funds are stepping up – at considerably better terms to what alternative broadly syndicated deals would have looked like.”

Bev Durston, managing director at Edgehaven, on the distorting effect of central bank action on the opportunity set at the advanced end of the distressed spectrum:

“There has been $11 trillion of central bank purchases and fiscal support globally, plus a significant amount of capital withdrawn from low-yielding bond instruments that is looking for a home.

“This excess liquidity, combined with central banks’ promises of years of low interest rates, may lead to ‘zombie capitalism’, as experienced in Japan. Companies that should default would instead be able to borrow at low rates, leading to lower default availability for a large volume of newly raised distressed funds.”

Daniel Zwirn, chief executive and chief investment officer at Arena Investors, offers a sceptical view of sponsor-lender relationships combined with doubt that things will change for the better:

“If they find themselves in a situation where they are out of the money and you as the lender are in the money – as we are seeing today – you shouldn’t expect friendly capital injections that stabilise the underlying business and mitigate lender risk. Nor should you expect pricing accommodations that compensate lenders for the equity risk they are now assuming in the absence of sponsor support.

“Will this disregard for alignment change as a result of covid-19? I hope so. But hundreds of years of empirical data in creditor-borrower relations would suggest otherwise.”

The full version of our cover story on the impact of covid on the asset class may be read in our September issue, downloadable here.

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