Debt Download
May 28, 2024

Debt Download

Welcome to Debt Download, Goodwin’s monthly newsletter covering what you need to know in the leveraged finance market. Temperatures aren’t the only thing heating up this month. Cash is burning a hole through lenders’ pockets—and borrowers are lining up to oblige. Read on to find out more about the scorching debt markets.

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In the News

  • Gross loan allocations reached $82 billion in the month to May 20, adding $16.1 billion in new supply after netting out associated repayments, against $23.7 billion in net demand, according to Covenant Review. Borrowers continued to capitalize on this supply-demand dynamic with a flex ratio of 33 pricing cuts to no increases, compared with 41 loans tightened in April against three loosened. Following this trend, the average all-in single-B spread shrank to S+363 (S+356/99.8 OID) from S+393 (S+382/99.6 OID) in April, with May's spread at its lowest since January 2020. Documentation scores in turn loosened markedly for the month, to 3.91 from 3.69 (with 1 being most lender-protective on the 5-point scale). One area of intense activity has been a surge in refinancings, repricings and maturity extensions for speculative-grade companies. For the year through May 16, such transactions hit $411.5 billion, which exceeded the record pace of $343 billion set in 2017. Repricings alone accounted for $244 billion, also a record. Borrowers engaging in repricings have cut spreads by an average 53 bps. Amend-and-extend (A&E) transactions also joined the party, recording $41.8 billion during the period, against $30 billion for a similar stretch in 2023, which still holds the annual record (for now).
  • Despite this celebratory vibe in the debt markets, rating agencies sounded the alarm in their monthly reports about the risk that higher-for-longer interest rates pose in the market, especially to middle-market borrowers and private credit lenders. S&P Global Ratings notes that defaults and ratings downgrades in that space stand at multi-year highs. Fitch sees a growing risk of a “no-landing scenario,” which describes a purgatory of static economic growth and interest rates; this in turn “could cause commercial real estate and lower credit quality consumer loan delinquencies and corporate defaults to rise more than currently anticipated.” Moody’s, meanwhile, in downgrading direct lending funds managed by BlackRock, KKR, FS Investments and Oaktree Capital Management, sees private credit funds facing “increasing performance challenges.” As for the debtors, Moody’s is particularly concerned about middle-market borrowers’ inability to service higher interest rates, a risk that is more pronounced among borrowers that refinanced from broadly syndicated loans (BSLs) into private debt, and about an increase in LBO defaults, the long-term risk for which may be masked by PIK toggles. 
  • Regional banks are already experiencing difficulty in this environment, lacking the fee-generating business of the big banks and finding their depositary business under pressure from high interest rates, according to the Wall Street Journal. Republic First Bank is the first casualty after being closed by Pennsylvania banking regulators and sold to fellow regional Fulton Bank. In general, this sector is having a rough Q1 earnings season, according to the Wall Street Journal. Profits slipped between 20% and 50% at U.S. Bancorp, Truist Financial, M&T Bank, Citizens Financial Group, KeyCorp, Huntington Bancshares and Comerica. The one bit of cheery news, according to the WSJ, was an increase in fee business (non-interest income) at several of these banks (U.S. Bancorp, Citizens and Key), indicating a possible path to success in a high-interest-rate world.
  • S&P Global Ratings issued a report tracking the increasing fluidity between public (BSL) and private debt categories—which is moving the pricing and documentation trends of private debt closer to those found in BSL. PitchBook reports that a big drop in M&A activity has left a massive supply hole, meaning “loan supply is running behind investor demand by a record amount.” Private lenders are also proving their flexibility in edging closer to BSL documentation. More open access to the BSL markets by lower-rated borrowers—again as a result of the supply-demand asymmetry—means that “documentation terms are getting looser with increased competition in recent months,” according to Sixth Street Specialty Lending as reported by PitchBook. However we choose to describe the dynamic between BSL and private debt, the head of Ares Management prefers we not call it “competition”: “no one is actually viewing it that way in the trenches,” especially given that the ultimate source of private funding is often the BSL banks.
  • On that note, Covenant Review has launched a quarterly review of liability management transactions (LMTs), providing descriptions of the various tactics along with charts showing their real-world applications. Of these, Covenant Review found that the double-dip was used more regularly in 2023 and continuing into 2024. On the other hand, Covenant Review concludes the uptier stands on shakier ground because of successful challenge in the Wesco/Incora cases. Covenant Review also highlights the vast differences in recovery rates based on the transaction and tranche, from a 1.5% recovery for non-participating third-out prepetition first lien lenders in Serta to 100% for priming debt in Serta, TPC Group, Revlon, Diebold and Cineworld. Generally, aggregate recovery rates for issuers that engaged in LMTs before bankruptcy was 47% in 2023, compared with 57% without.
  • As financial conditions continue to favor borrowing even amid a quiet LBO market, the spotlight was on the net asset value (NAV) loan at the Milken Institute’s Global Conference last week, according to DealBook. NAV loans allow PE firms to meet fund investor demand for distributions in this period of fewer exits and other liquidity transactions, but at the risk of increased leverage and uncertain lender recourse (which is against illiquid assets) in the unlikely event of a default. The conclusion from the conference seems to hinge on use of proceeds: “If you have transparency on the usage, and that aligns with the L.P.s, things are probably going to be very positive,” according to a Neuberger Berman managing director quoted in the article. Fitch Ratings echoes these concerns in a recent report, noting the higher risks resulting from increasing demand for these facilities coupled with lower portfolio values and higher interest rates. The November 2023 edition of Debt Download took a closer look at NAV facilities.
  • Quick roundup of recent new direct lender debt funds and related news:

Goodwin Insights

One investor’s distress may be another’s opportunity. Section 363 of the Bankruptcy Code allows a debtor to sell its assets outside the ordinary course of business, often pursuant to a public auction. This process offers many advantages, including distressed pricing, but at the expense of tight timelines, restricting a potential buyer’s due diligence and financing contingencies. In this primer, Goodwin’s Financial Restructuring group takes us through the bidding process and weighs the advantages and disadvantages of a 363 sale.

In Case You Missed It – Check out these recent Goodwin publications:

Subscription-Secured Credit Facilities: Recent Developments in the US Market and Considerations for Real Estate Funds; Indiana Enacts Broad Notification Requirements for Healthcare Transactions with a Clear Focus on Private Equity; FinCEN (and SEC) Propose New Customer Identification Program Rule With Minimal Expected Impact on Private Fund Sponsors; CFPB Reports Troubling Trends in Credit Card Rewards Programs; FDIC’s Board of Directors Considers Proposed Rulemaking Amending Regulations Implementing the Change in Bank Control Act; Navigating Bank Failures: Lessons Learned; CFPB Updates its Procedures for Determining Which Nonbanks it Can Supervise; Healthcare M&A and Financing Trends and Predictions for 2024


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, and Robert J. Stein.

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This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.