Loan Note

Monday, February 19, 2024

Uptick in distressed and special situations deals expected in the UK this year. Plus: Europe's default rate looks set to stabilise; and why it's a decent time to deploy capital in mid-market loans. Here’s today’s brief for our valued subscribers only.

They said it

“With cautious banks and investors putting the brakes on leverage, the average debt multiple of large corporate LBO deals fell to 4.8x in 2023, the lowest leverage level in 13 years”

Taken from Monroe Capital's latest Monthly Market Update

First look

Dawn of the walking dead: distress looming in UK

Source: Getty

UK to see rise of the zombies
Following last week’s news that the UK economy had tipped into recession at the end of 2023, many investors are expecting a rise of distressed debt activity in the country in 2024.

More than 70 percent of investors participating in business advisory firm FTI Consulting’s Special Situations Investor Survey said they were pessimistic about the economic outlook in the UK with zombie companies – which can just about survive but not grow – expected to increase due to testing trading and financing conditions.

Eighty percent of investors surveyed said they were expecting to deploy “more” or “significantly more” capital into special situations opportunities this year.

“We expect to see an increase in distressed deal activity in the year ahead as a growing number of sponsors and lenders conclude that seeking an exit is likely to be the optimal solution for the more stressed assets in their portfolios,” says Ben Hughes, a senior managing director in the special situations M&A practice at FTI Consulting.

Such a prediction is born from the expectation that 2024 will not be another false dawn of the type witnessed over the last couple of years. At the start of last year, 77 percent of investors said they expected an increase in special situations M&A – but a lack of quality of opportunities being marketed meant that there was no significant increase in capital deployment, according to the study – in 2022, a similar situation prevailed.

European default rate expected to stabilise
A new report (login required) from S&P Global Ratings predicts the European trailing-12-month speculative-grade corporate default rate to finish the year at 3.5 percent – exactly the same as the 3.5 percent recorded at the end of last year.

It's a rosier picture than most rating agencies have previously been forecasting, on the back of expectations for a soft-landing economy supported by wage growth and disinflation.

On one hand, the speculative-grade loan and bond markets have opened up in recent months, allowing firms to reprice and refinance existing debt. But, on the other, growth-orientated debt usage such as M&A and capital expenditure continues to be muted due to selective investment and restrictive interest rates.

In an optimistic scenario, S&P says the default rate could decline to 2 percent if the economy performs better than the firm’s economists’ base case. But it could rise as high as 5 percent in a pessimistic scenario based on a poorly performing economy and continued high interest rates throughout the year.

Green light for capital deployment
Thinking of putting money to work in mid-market loans in 2024? The outlook to do so is “quite favourable” according to an Antares Capital white paper.

This assessment is based on: all-in yields and mid-market yield premiums at the high end of their long-term range; total debt to EBITDA leverage lower than the long-term average; private equity-sponsored LBO equity contributions near record highs; and first-lien yield per unit of leverage the highest it has been since at least 2013.

Less favourable in leveraged buyouts is the EBITDA to cash interest, given the spike in interest rates and the pressure it has put borrowers under. According to the study, this ratio is currently in the 1.5-1.9 times range for deals with total leverage above 5x. According to Antares, this is an acceptable cushion if earnings hold up as expected and interest rates decline – but it’s less than the 2.5x cushion typically seen in recent years.

Essentials

AlbaCore announces latest CLO
European credit firm AlbaCore Capital Group has priced AlbaCore Euro CLO VI, its sixth collateralised loan obligation, at €402.3 million. The latest vehicle grows the total value of AlbaCore’s CLO issuance to date from €2.2 billion to around €2.6 billion.

In line with AlbaCore’s previous CLOs, Euro CLO VI incorporates negative ESG screening criteria in combination with the firm’s fundamental research and risk-focused ESG considerations, including restrictions on the industry type in which the CLO can invest.

Sole arranged and placed by Jefferies, the CLO priced on 13 February 2024 with closing expected on 28 March 2024 subject to customary closing conditions.

New MD for Silver Creek
Silver Creek Capital Management , a Seattle-based fund manager, has hired Jessica Hans as a managing director. She will be on the firm’s investment committee and real assets investment committee.

Silver Creek, launched in 1999, is expanding its private credit and real assets portfolios.

Most recently, Hans was investment director at UC Investments, working on the endowment and retirement plans of the University of California. There she managed $168 billion of assets as of 30 September 2022. She has also held positions at Blackstone Group, Credit Suisse Securities and Bain.

Silver Creek recently promoted Amy Wells to chief client officer. Wells has been with Silver Creek since 2006 as managing director. Before coming on board that year, she held positions at Washington Mutual and Deloitte & Touche.

Ely Place hires research head
Ely Place Partners, a London-based alternative assets advisory firm, has appointed Gareth Morgan as head of research.

He will lead the Prospect Private Markets business line, an LP mapping service that streamlines the fundraising process for GPs by identifying high-priority LPs and providing insights into allocation plans for clients’ strategies.

As part of his role, Morgan will also contribute to Ely Place’s GP Advisory services, providing tailored support throughout the fundraising cycle: investor relations, fundraising strategy, documentation, pre-marketing and project management.

His experience in private markets includes research and advisory roles, such as advising GPs on LP communications at Brackendale Consulting, where he supported the production of investor newsletters, market reports, blogs, ESG reports, PPMs, and investor presentations.

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LP watch

Institution: Korea Post
Headquarters: Sejong-Si, South Korea
AUM: $148.1 trillion Korean won
Allocation to alternatives: 10.46%

Korea Post has issued a request for proposals for domestic mezzanine fund managers.

The firm plans to commit up to 150 billion Korean won ($113 million; €105 million) to at most three private debt funds. Eligible managers should manage a fund at least 50 percent allocated to mezzanine strategies and 200 billion Korean won in target size.

The submission deadline is 27 February 2024, with a decision set to be put to the investment committee in April.

The 148.1 trillion Korean won government agency has a 10.46 percent allocation to alternative investments.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

Today's letter was prepared by Andy Thomson, with John Bakie, Christopher Faille and Robin Blumenthal contributing

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