Eric Koza
Partner & Managing Director, Americas Co-Leader, Turnaround & Restructuring
New York
The private credit market has experienced significant growth in recent years, fueled by two key trends.
First, a strategic response emerged to address the gap in corporate financing created by traditional banks tightening credit standards and reducing loan availability. Second, the long period of low interest rates spurred a surge in interest towards alternative investment strategies, positioning private credit as an attractive option for investors seeking higher yields. This confluence of factors has led to the emergence of new participants in the private credit space, providing much-needed alternative financing solutions.
However, the full picture of credit health within the rapidly growing private credit sector is nuanced. Unlike the syndicated loan market, the private credit space lacks the same level of transparency, which can often provide leading indicators of trouble or distress. In addition, the significant rise in liability management transactions (LMTs) has provided companies with additional breathing room to navigate challenging financial periods. While this flexibility is positive, it’s important to acknowledge that LMTs can potentially mask underlying credit issues by extending debt maturities or restructuring terms.
While LMTs can buy companies and their equity holders time to grow into their capital structure, these transactions often fail to address core operational and strategic issues causing financial distress in the first place. This shortcoming makes these companies prime candidates for future restructuring activity, potentially leading to a rise in defaults within the private credit, syndicated loan, and high yield markets.
More broadly, the middle market has quickly become a world of “haves” and “have nots”, where capital availability is more challenging. On one hand there re businesses that have a purpose, growth, and opportunity ahead of them, and these will typically be able to find financing and solve underlying operational problems to ensure they stay on the right path.
On the flip side, though, there are businesses that struggle to exist, and have been extremely challenged over a multi-year time period. Finding financing for those is going to become ever more challenging, particularly where those looking to deploy new capital will be looking at the entire landscape, avoiding any questionable investment opportunities. The focus will be on those companies that are more likely to have a chance of long-term survival and create a better risk/reward profile.
It is critical that leadership teams get ahead of these challenges and avoid waiting until the last minute. If an opportunity exists to secure incremental liquidity that may be needed over the next couple of years – via private credit or other sources – companies should take it now. With the potential for a tightening credit environment, the window may close on opportunities to secure favourable financing in subsequent funding requests.
Allied to this, management teams must remain relentlessly focused on optimizing their organization for the future. Beyond cost cutting and operational improvements, companies must have a clear vision for strategic investments over the next two, three, or four years. The world is changing at a more rapid rate than ever before and demands a specific skill set that balances crisis management with a proactive strategy around growth, market share, and long-term success.
