JPM PRIVATE CREDIT REPORT - A MUST-READER FOR INVESTMENT PROFESSIONALS

Ladies and gentlemen, we are back with another amazing report by JP Morgan on the private credit market. Everyone is screaming “The Golden Age of Private Credit”, but what are the numbers telling us?

So excited to dive in —→
1) PIK Usage Over Time
2) The Rise of Private ‘Opportunities’ Vehicles (Apollo Hybrid, BX TacOps, Ares Opp Credit)
3) LBO Volume and Sources of Financing
4) Rise of CLOs but more Room to Run
5) The Century of Private Credit
6) Pricing of Private Credit vs Leveraged Finance Markets
A 🧵 Thread 1) PIK Usage Over Time

JPM shows the average has increased by ~250bp over the last 5 quarters, but dispersion across managers is high.
I will always expect to see high dispersion, different funds approach lending in different ways so this is nothing new under the sun.

On the other hand, I see the general increase in PIK usage as a sign of general debtor weakness. Using PIK results in total interest (but helps cash flow in the short term as interest accrues to the principal) and it is never the first choice.

Creditors feel like they have the upper hand and are able to negotiate more favorable terms.

I also find it interesting that the two lenders with the highest PIK usage in 1Q23 (Blue Owl Technology and Prospect Capital) have seen a 5%+ reduction

JPM also adds an important note saying “We do note that not all PIK loans are toxic; some Software loans are structured as annual recurring revenue (or ARR) loans** and are expected to be non-cash pay in the early years. Those loans explain the high percentage of PIK loans at the Blue Owl BDCs, which tend to be heavily focused on Software.”

While I can see what argument JPM is making, 2024 has shown us how ARR loans can end in disaster. On Friday, the newsletter will write more about PluralSight, a perfect example of an ARR Loan priced at SOFR + 800 which brought the company down.

** The Pari Passu Newsletter will cover ARR Loans at some point

MOODY'S REPORT ON DISTRESS IN PRIVATE EQUITY LAND | A MUST READ

As a former restructuring banker and current private equity associate, this is the sexiest thing I have read in months. So excited to dive in —→
1) Large-Cap Private Equity Recent Defaults
2) PE shops with the most default deals
3) PE shops with the most dividend recapitalizations
4) PE shops with the most distressed deals
5) Upgrades and Downgrades across PE Shops
6) Approach to Leverage across PE shops
7) Downgrade odds across PE vs non PE companies
A 🧵 Thread 1) Large-Cap Private Equity Recent Defaults

“Private-equity owned companies drove corporate defaults higher – hitting some 6% at the end of Q1 2024, the highest since the pandemic.

In fact, around two-thirds of defaults since the 2020 default cycle stemmed from PE-owned LBOs. However, there were some differences in default performance among firms owned PE sponsors.

Overall, between 2022 and August 2024, companies owned by the top 12 private equity firms defaulted at a somewhat slower pace than their counterparts owned by the rest of the PE firms in our rated universe, with default rates of 14.3% versus 16.7%, respectively.

However, both PE cohorts defaulted at a much higher rate than the group without any private equity presence (at 7.1%). [Key Stat #1]

Distressed exchanges (DEs) were the most common default type between January 2022 and August 2024 across all PE-owned debt issuers. This data reinforces an ongoing trend of private equity sponsors heavily favoring DEs as a debt restructuring tool, which helps them sidestep a costly bankruptcy process and preserves their equity.”