Private credit hit by growing pains as agreements get longer and execution slows

Kellie Ell

Reporter

The rapid rise in private credit continues to stir up excitement among borrowers. But, despite the sector’s competitive advantages — such as speed of execution and light regulation — deals are taking longer to close as the industry expands.

“Twenty-five years ago some of these agreements would be 80 or 90 pages. Now a credit agreement for a private equity sponsor — for top-tier, big private equity sponsors that are in the market often, whether it’s private credit or broadly syndicated loans — is 250 or more pages,” says Gus Atiyah, a partner in the private capital finance team at global law firm Shearman & Sterling.

He adds: “It’s not like a big episode happened and a lot of documentation was added. Issues happen over time and 10 pages pop up with related definitions, and the documentation just grows. I’ve never had a situation where these documents have been simplified.”

A few common causes for deal delays include complexities and new situations. Transitioning away from LIBOR to SOFR is one example. Documentation for each could add an additional 10 to 12 pages of adjustments and related definitions, Atiyah estimates. The possibility of payments made in error — and what to do as a result — can add even more pages. As does the uptick in default rates.

“There’s heightened attention to reporting obligations”

Ji Hye You, Partner | Proskauer

Law firm Proskauer tracked 990 active loans for its Q3 2023 Private Credit Default Index and found that the default rate for companies with $50 million or more of ebitda was 1.2% in the third quarter, up from 0.8% in Q2. The default rate for companies with ebitda between $9.9m and $25m went from 1.6% to 2.5% during the same timeframe.

“For our clients, there’s additional diligence that’s being done and more work that’s being put into underwriting deals that are getting done today,” says Ji Hye You, a partner in Proskauer’s private credit group.

“I think the primary drivers are that the lenders are finding themselves in a place where they have a bit more leverage in negotiating covenants. There’s a heightened attention to reporting obligations, because the lenders are being more proactive about monitoring the company’s performance,” she adds.

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Global credit funds & CLO's

January 2024 | Issue 260

Published in London & New York.