Will today’s mid-market loans be tomorrow’s distressed opportunity? We sought the views of Robert Thompson, senior portfolio manager – credit at UPS Group Trust, and Dwight Scott, senior managing director and president at GSO Capital Partners, at our PDI New York Forum.
RT: First of all we’re concerned about the adjustment to EBITDA. We’re seeing as much as 30 to 40 percent in certain deals. I think we’re also concerned about just where we’re at in the capital structure relative to in the past. So if we do go through some sort of downgrade or distressed period, what’s going to be my ultimate recovery? Is it really going to be the 70 percent that we’ve had in the past? Or is it going to be 20, because the fact is we have more unitranche structures than we did during the last cycle.
DS: I think that because there are a lot of transactions being done today, there’s always the risk that you’ll see some distressed come out of that strategy. However they are not as highly levered and they tend to be very unitranche-oriented in the kind of credit we’re giving. And so unitranche is – because they cover so much of the structure and because they are protective in their positioning in the capital structure – I don’t see a lot of the distress coming out of that. Instead I see a lot of distress coming out of the public markets when the market corrects because that’s where the leverage has begun to tick up – BBBs, for instance, the leverage has really begun to tick up, and you see CCCs this year have had a great year. That’s where I think you’ll really start to see the distress if the market hits a speed bump.