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Private debt may inadvertently morph into private equity more quickly than anyone imagined. In a series of 2023 deals, struggling companies that had traditional syndicated term loans coming due found a lifeline in private credit funds.
Companies such as Finastra, Trinseo and PetVet raised fresh capital from private credit firms at nosebleed interest rates. Sometimes relying on exotic structures known as “double dips” and “uptier exchanges”, where majority creditors can seize collateral from fellow creditors if things turn ugly.
The deals have enabled these teetering groups to hang on for a couple more years. But expect many of these rescues to go awry. WeWork and Envision Healthcare executed their own debt exchanges, refinancings and capital raises only to fall later this year into Chapter 11 bankruptcy. Private credit stalwarts including Apollo, Oaktree, Angelo Gordon and a handful of others can then seize control, moving from creditors to owners.
Steve Schwarzman said this year that with loans and bonds yielding well over 10 per cent, lending money offered such an easy win that private capital titans could sit back and pursue their hobbies.
Maybe for a few months. Companies bailed out in such private credit refinancings cannot all escape their restrictive capital structures. Many of these private credit lenders fully understand that they have taken on a “loan to own” situation, taking over overly leveraged businesses. Debt will be swapped into equity.
One might ask why these companies prefer these private credit refinancings instead of pursuing a painful, but cleansing, immediate bankruptcy to flush out excess debt. Almost always the answer is to keep remote “options” alive, especially when the owner is a traditional private equity sponsor.
Many upstart private debt funds have yet to prove that they have financial workout and turnaround skills. The good news for them is that they should get the opportunity to show off their skills next year.
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