Peter Antoszyk and David Hillman, co-heads of Proskauer Rose LLP’s private credit restructuring group, think the dry powder that investors have access to will help ease restructurings. They advised 75 direct lending funds in more than 200 transactions last year, totaling about $42 billion worth of deals.
Antoszyk, a partner who is also in the private credit group, and Hillman, a partner in the restructuring group, spoke on July 9. Comments have been edited and condensed.
How will private restructurings be different?
Antoszyk: Our clients invest up and down in the capital structure, as both single lenders and in smaller club deals. In a restructuring, they have the unique capacity to bring the financial, operational and new capital resources that traditional lenders, such as banks or CLOs, don’t have. They also have available dry powder to deploy, and the flexibility to exchange their debt for equity and control and operate a business. That’s not their first choice, but if they have to, they can own and operate the business to see a turnaround through. That’s very different than what you’ve seen in the last cycle or previous cycles.
Has the amount of dry powder available been a factor?
Hillman: Not all distressed companies have operational challenges. Sometimes the difficulty is something that’s temporary in terms of cash flow and liquidity, and while you may have an over-leveraged balance sheet, at its core, there’s a healthy business. As a result, what’s necessary is the infusion of capital to bridge this period and sometimes you see the equity sponsor who’s willing to put in new money. Alternatively, the lenders themselves can reach into their dry powder to protect their investment by making rescue loans. So the existence of dry powder, we’re certainly seeing that it’s been beneficial in terms of facilitating a restructuring.
What are the biggest risks in private credit right now?
Antoszyk: A significant risk factor, particularly as it plays out in a restructuring, is some of the documentation or structuring challenges we’ve seen. For example, you’ll see either no covenants, and covenant-lite or covenant-loose. You see borrower-friendly Ebitda definitions where you have either no caps or loose caps. Those caps being defined as 35% or more add-backs, no caps on synergies, potentially uncapped revenue enhancements, you know, things of that nature. And you have J. Crew or Petsmart issues.
In a competitive environment, you make thoughtful underwriting choices and sometimes they don’t work out. And if the documentation comes into play in a restructuring, you know, these types of provisions could lead to either delay in the private credit lender getting to the table to participate in a restructuring, or it could lead to collateral leakage like you saw in the J. Crew.
One of our jobs is to try to as best as we can, given the competitive environment we’re in, is to try to tighten up some of those documents. But that is the nature of the finance world we live in today.
