Little scrutiny: People pass the New York Stock Exchange. The lack of clarity on what an asset’s worth is a regular complaint in private markets and that’s starting to alarm regulators and some demanding stronger protections in their credit agreements. — AP
NEW YORK: At the end of June, Alacrity Solutions’ debt looked like a solid bet, at least according to the prices assigned to it by lenders, a group that included Blue Owl Capital Inc, Antares Capital and KKR & Co.
Cut to late October and, with little warning, the insurance claims manager was headed into full-scale restructuring talks.
A rapid deterioration in earnings was blamed as weather-related claims dwindled and more insurers brought adjusting services in-house.
By early January, the private credit lenders, who had made a US$1bil wager on the business via senior debt, took the keys while its majority owner, BlackRock Inc, saw its equity wiped out entirely, Bloomberg previously reported.
Goldman Sachs Asset Management, which had provided US$500mil of junior capital, was also wiped out and given a minority stake in the restructured company.
The size of the problem would have been hard to glean based on public disclosures made by the private credit funds.
It wasn’t until a month before the restructuring talks that the lenders had to come up with new valuations for the debt, and quarterly reports with those numbers were only made public weeks later.
At the end of June, filings showed Blue Owl had the loan marked at a modest discounted price of around 98.5 US cents on the dollar, while KKR and Antares had it at 98.8 cents and 96.7 cents, respectively, levels typically associated with performing businesses.
It wasn’t until the end of September that the funds started marking down the value of the debt more aggressively.
Blue Owl and KKR lowered their marks to 82.3 US cents and 85.,1 respectively, while Antares held steady at 91 cents.
The range is not unusual in the opaque universe of direct lending where even larger discrepancies can be found between how private fund managers value the same debt.
And the generous pricing ahead of Alacrity’s woes cuts to the heart of an issue that has plagued direct lending since its inception.
Fund managers have ample discretion when marking the value of the loans they originate.
Because they only need to report those values to investors quarterly, big gaps can exist between the marks and the performance of the underlying companies.
“It is a private process and outside investors and analysts do not have access to portfolio company financials to be able to assess things independently,” said Clay Montgomery, a vice-president on the private credit team at Moody’s Ratings.
“Valuations are based off the last available information which may not fully incorporate the real-time performance of a company.”
Blue Owl, Antares and KKR all declined requests to comment on their marking processes.
Still, a restructuring doesn’t mean that the value of the debt is zeroed-out like the equity usually is.
The lenders taking control of Alacrity are focused on a turnaround and are optimistic about their recovery prospects, according to people familiar with the matter, who asked not to be identified because they aren’t authorised to speak publicly.
The company’s financials stabilised in the last quarter, they said.
Direct lenders are estimated to have recouped around 51% of their money on sponsor-backed deals that defaulted in 2024, according to an analysis by KBRA DLD.
That number is expected to decline slightly to around 50% this year.
Alacrity’s takeover wasn’t the first time the veneer of safety around the world of private credit was shattered.
Last year, Vista Equity Partners took the controversial step of moving some intellectual property of its struggling educational-software company Pluralsight Inc away from lenders to make an interest payment.
In August, the private lenders took over the business after Vista’s equity was wiped out.
Since then, some lenders have demanded stronger protections in their credit agreements.
The lack of clarity on what an asset’s worth is a regular complaint in private markets, and that’s starting to alarm regulators.
While there was little scrutiny when interest rates were close to zero, with today’s higher rates financial watchdogs are beginning to fret about the lack and transparency and valuations.
David Havens, a Bloomberg Intelligence analyst, said: “If something is truly impaired, or heading that way, then the lender has a fiduciary responsibility to reflect that.
“But judgments on timing and immediate severity can vary.” — Reuters