I have previously commented on crazy debt financing that I have personally observed. Here are two others who have observed the same...
Doug Cruikshank, New York-based head of fund financing at Hark Capital, a business of Aberdeen Standard Investments, said: Loans based on so-called EBITDA add-ons, which is when actual EBITDA numbers are increased based on possible future earnings, and loans with few covenants to protect lenders will have a greater impact on credit returns than in the last recession.
Mark Attanasio, Los Angeles-based co-founder and managing partner of credit manager Crescent Capital Group LP, said: The reason is that in the years leading up to the current crisis there were a lot more loans issued by private credit managers with fewer covenants and earnings based on potential future cash flows. As a result, the damage to investors' portfolios is likely to be "worse this time.”
It was sold as a defensive strategy, but coronavirus could capsize performance
Private credit investments were sold as lower risk than equity strategies, with some types of credit such as distressed debt considered defensive, but the COVID-19 crisis makes those performance expectations an open question, industry sources said.
Credit managers today are having to deal with investments predicated on the good times continuing in a growing economy awash in cash. Such firms had competed for deals by requiring fewer — if any — covenants, offering looser fund terms and lowering their own return expectations. Now, for the first time, they are talking with borrowers, many of which are private equity firms' portfolio companies, about forbearances, restructuring loans and covenant waivers, and making other accommodations to lessen the likelihood of defaults.
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