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Diamond Sports听held a status conference before presiding Judge Christopher Lopez today, with Brian Hermann of Paul Weiss reporting the company鈥檚 progress in securing long-term distribution deals, including a听, despite failing to ink a long-term contract with Comcast.

According to Hermann, the solicitation process is still active with the confirmation hearing scheduled for June 18. The company has been making strides in negotiating long-term contracts with key distributors. Charter, the largest distributor, and DirecTV, the second-largest, along with Cox, have been part of successful discussions that cover about 80% of broadcast coverage.

Additionally, Hermann outlined advancements in naming rights negotiations, stating a new naming rights deal is reportedly close to completion but not yet finalized. The debtor鈥檚 settlement with Sinclair allowed Diamond Sports to renegotiate its naming rights contract, which was previously with Ballys.

However, the situation with Comcast, the third-largest distributor, has reached an impasse, according to Hermann. The existing agreement with Comcast expired April 30, and while Diamond Sports Group offered to extend on a short-term basis, Comcast declined and subsequently removed Diamond Sports鈥� RSNs from its offerings.

MLB and certain teams听听ahead of today鈥檚 status conference and sounded off on the debtor about whether it has a viable path forward. James Bromley of Sullivan & Cromwell for MLB stated in the filing that the failure to renew a crucial carriage agreement with Comcast, resulting in the blackout of broadcasts for numerous MLB teams on the Comcast service since May 1, has stripped away a substantial revenue stream essential for the proposed reorganization plan’s success.

MLB and clubs such as the Atlanta Braves, Detroit Tigers, Milwaukee Brewers, Minnesota Twins and others are already feeling the impact of the distribution disruption, according to the MLB statement. Millions of fans across a dozen markets are currently unable to watch their favorite teams’ games, a situation the MLB deems as causing “immediate and irreparable harm.”

The concerns expressed by听MLB were echoed by counsel for both the NBA and NHL during the hearing.

However, the debtor secured court approval of its contract with DirecTV at the hearing. According to court filings, the contract with DirecTV would be a multiyear renewal, ensuring the continued distribution of Diamond Sports’ local sports content through DirecTV’s platforms, and promises mutual releases between the parties, effectively resolving prior disputes.

The next status conference is June 4 at 12:00 ET in the Southern District of Texas Bankruptcy Court.

Jennifer Lappe, J.D.

+1 346 256 1345

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• We were asked to present to a group of government officials in Washington D.C. last week on the private credit market following the release of our collaborative three-part primer series combining our own analysis with tremendous work done by our colleagues in Covenant Review, LevFin Insights and Fitch Ratings.听A PDF of the slide deck we put together is attached in the body below.
• In preparation for the conference, we looked at the US direct lending market more closely from a systemic risk lens and our takeaway is the private credit market is unlikely to pose a material risk to the financial system in our base case forecast. As a reminder, our base case forecast is for economic growth to slow to modestly below potential this year with the Fed cutting rates in 2H24.
• However, if our hard landing scenario comes to pass with the US economy falling into recession in the next twelve months, companies that borrow in the private credit market are likely to feel acute fundamental pain as they tend to have higher leverage than companies that borrow in the BSL or HY bond markets.听Liquidity pressure could be transmitted through the drawing of revolving credit facilities by the borrowers in the private credit market (typically PE-owned portfolio companies), which may cause the private credit direct lending funds to draw on their revolving credit facilities provided by traditional commercial banks.
• The available data show that leverage is limited within private credit direct lending funds and US commercial banks are well capitalized/have plenty of liquidity.听There is also plenty of cash in the financial system broadly, with nearly $9 trillion combined between private credit dry powder, private equity dry powder and cash held in money market mutual funds.
• The popularity of private credit is another risk factor to consider, as heavy inflows into the product may pressure lenders to weaken documentation in order to put large cash piles to work.听Our colleagues in Covenant Review note that the average documentation score for private credit funds dipped to the lowest in the history of the data set in 1Q24. This is not a private credit-specific trend, as doc scores for BSLs also fell to a recent low. We will be closely monitoring this trend.
• Our colleagues in LevFin Insights do not currently see broad-based undue risk-taking by direct lenders, but note the possibility of increased risk-taking by new entrants who do not have the same underwriting standards/experience as other firms/funds that have been active in the space over the past seven or eight years.

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• We provide an update to our US HY vs Leveraged Loan comparison for 4Q23 using leverage metrics for constituents in the US HY ICE/BAML index and leveraged loan data from Bixby Research and Analytics to assess net and gross leverage, EBITDA margins, and interest coverage in aggregate and at the rating level.听Due to the difference in reporting timelines and fundamental metrics for public and private loan issuers, we breakout the leveraged loan universe into two separate cohorts with data from ~330 public issuers and over 75% of the ~750 issuers within the private loan universe.
• HY bond issuers improved net leverage metrics QoQ across-the-board, led by the top quartile (those issuers with the highest leverage), which decreased by 0.23x to 5.11x in 4Q23.听Median net leverage ticked down by 0.11x to 3.33x while leverage in the bottom quartile remained essentially unchanged with a nominal decline of 0.01x to 1.85x. YoY changes followed a similar trend, with the top quartile leading deleveraging efforts with a 0.73x decline followed by the median (-0.20x) while the bottom quartile increased net leverage by 0.10x.
• Following a spike in median net leverage to a peak of 7.17x in 3Q20 and ensuing recovery through 2021, median net leverage in the public loan market has plateaued over recent quarters, with just a 0.05x move lower to 4.23x.听Issuers in the bottom quartile deleveraged by a larger extent with a 0.15x QoQ decline to 2.41x while those in the top quartile increased leverage by roughly half a turn to 7.57x. YoY changes were mixed across the distribution with the median inching down by 0.04x and the bottom deleveraging by 0.19x while the top quartile reported a material 1.86x decrease.
• Net leverage metrics for private loans have historically stood elevated relative to HY bond and public loan levels with 4Q23 median net leverage remaining materially higher at 6.98x after deleveraging 0.19x QoQ.听The bottom quartile continued to move sideways QoQ with a -0.03x move to 4.90x while the top quartile downshifted by nearly three-quarters of a turn to 10.05x. Current leverage metrics remain below the historical median dating back to 1Q19 with the top quartile standing materially below by 2.85x.
• Deleveraging efforts were broad-based across ratings in the HY bond and leveraged loan universes, led by lower-rated tranches.听In the HY bond and private loan space, <=CCCs drove deleveraging with material QoQ downshifts of 0.43x to 5.02x for HY bonds and 0.69x to 8.75x for private loans. We omitted the <=CCC public loan rating bucket from our analysis due to the small sample pool of just eight issuers. For public loans, single-Bs, the lowest-rated tranche within our dataset, deleveraged by 0.29x to 5.08x. QoQ leverage changes were more modest among higher-rated tranches, particularly for HY bonds and public loans. In the HY bond market, BBs and single-Bs declined nominally, by 0.03x and 0.01x to 2.79x and 3.93x, respectively, while BB public loan issuers similarly inched sideways with a minute 0.01x decrease to 4.18x. Private loan issuers experienced greater changes to net leverage with BBs falling 0.26x to 5.10x as single-Bs declined 0.11x to 7.02x.
• Profitability among higher-rated tranches decreased QoQ across HY bond and leveraged loan markets with BBs reporting the greatest EBITDA margin compression.听Within the HY bond market, BB EBITDA margins compressed 13 bp QoQ to 17.4% while single-B margins expanded 13 bp to 19.2% and <=CCC margins expanded a whopping 92 bp to 15.6%. Similarly, in the public loan space, BB margins compressed 24 bp to 14.88% while single-B margins expanded 110 bp to 9.88%. However, despite the strong margin recovery, single-B margins for public loans currently remain below the recent median dating back to 1Q20 following a continued period of elevated double-digit margins between 1Q21-1Q23. EBITDA margin trends were mixed among private loan issuers with BB profitability declining 65 bp to 17.55%; single-B margins expanding 26 bp to 15.39%; and <=CCC margins compressing 20 bp to 14.53%.
• Interest coverage trends varied among HY bonds and leveraged loans with moderate QoQ changes across the loan universe while HY bonds experienced greater changes, particularly among <=CCCs, which increased 0.30x to 2.61x on the back of strong QoQ deleveraging and improving profitability.听BB-rated HY issuers decreased interest coverage by 0.12x to 5.66x while single-Bs decreased 0.24x to 3.53x, both standing below the historical median dating back to 1Q19 by 0.40x and 0.25x, respectively. In contrast, interest coverage improved among higher-rated leveraged loan issuers with BB-rated private loan issuers increasing coverage by 0.08x to 2.22x while BB-rated public loan issuers increased by 0.14x to 3.54x. Interest coverage declined across single-B-rated tranches with HY falling nearly a quarter turn to 3.53x while coverage for public (0.06x QoQ change) and private loans (0.08x) decreased by a smaller extent to 1.74x and 1.36x, respectively.
• HY issuers built up their cash balances across the rating spectrum with <=CCCs adding $44.2 mn QoQ to $248.1 mn.听BB cash balances increased $24.5 mn to $379.5 mn while single-Bs reported a modest $5.4 mn increase to $229.0 mn. Across the loan universe, BBs decreased cash to over $40 mn below historical medians following a material $54.5 mn QoQ decline among private issuers to $134.0 mn and smaller $3.0 mn QoQ decline among public issuers to $273.0 mn. Lower-rated loan issuers increased cash balances with B-rated public issuers increasing cash by $11.4 mn to $137.7 mn. Cash balances are materially lower among private issuers compared to public loan and HY bond issuers. Single-B-rated private issuers increased cash modestly by $6.7 mn to $59.3 mn while <=CCCs nominally increased by $0.8 mn to $36.4 mn.

Net Leverage by Rating

EBITDA Margin by Rating

Interest听Coverage by Rating

Cash ($MM) by Rating

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Steward was desperately low on cash in the months leading up to the bankruptcy filing, court documents show, unable to make regular payments to vendors and medical staff and for operating facilities. The hospital chain filed with just $75mn of up to $300mn DIP commitments in place, suggesting that seeking court protection was an emergency measure. DIP financing provided by MPT, together with the REIT’s other secured听claims against Steward,听could mitigate potential losses stemming from $6.6bn of future rent obligations that may go unpaid.

With Steward鈥擬PT’s largest tenant, in which it also holds a 9.9% equity stake鈥攏ow in bankruptcy, the healthcare REIT鈥檚 outlook has considerably dimmed. The company has $10.1bn of debt on its balance sheet, including $1.44bn scheduled to mature in early 2025. Short sellers have piled into the stock over the last year, bringing the short interest to 37%, while the stock price has fallen 65% since the beginning of 2023.

To fend off a liquidity shortfall of its own, MPT recently announced two asset sale transactions that brought in a combined $1.3bn of cash. The REIT first divested five hospital properties in California and New Jersey for $350mn, with proceeds including $250mn cash and a $100mn mortgage note. That was followed by a complex transaction with Blue Owl that saw MPT sell its stake in five Utah hospitals to a JV for $886mn, receiving an additional $190mn of proceeds from JV borrowing. (See LFI鈥檚 breakdown of the asset sale transactions听.)

MPT is scheduled to release results for the quarter ended March 31 tomorrow morning with a conference call scheduled for 11:00 ET. (See LFI鈥檚 synopsis of Steward鈥檚 first day hearing听.)

MPT鈥檚 change of fortunes follows years of rapid growth by means of property acquisitions, funded primarily by corporate borrowing. Real estate assets have more than doubled over the last five years, peaking at $17.4bn in 2021, before more than $3bn of asset sales in 2022 and 2023. At the same time, the company鈥檚 balance sheet debt has increased from $4bn in 2018 to more than $10bn at the end of last year.

After Steward stopped paying rent to MPT in October 2023, MPT鈥檚 revenues fell precipitously, declining more than 44% on the year to $872mn. That included straight-line rent adjustments that resulted in reported revenues of negative $122mn for Q4. After annual interest expense increased to more than $400mn, the REIT generated annual pretax loss of $687mn.

Risk Factor: Steward Exposure听

MPT鈥檚 outsize exposure to Steward has a long and complex history. The hospital group was founded in 2010 through the acquisition of six hospitals by Cerberus for $246mn plus the assumption of $220mn of pension liabilities from Caritas Christi Health Care in Massachusetts. In 2016, Cerberus entered a $1.25bn sale-leaseback agreement with MPT, generating proceeds used to facilitate a merger with IASIS Healthcare and acquire a portfolio of hospitals from Community Health Systems.

In May 2020, in the early days of the pandemic, Cerberus听听through听a recapitalization of Steward that transferred control to a management group led by CEO Ralph de la Torre. At the same time, MPT agreed to acquire certain Steward assets for $400mn cash. In January 2021, MPT purchased a $350mn convertible note held by Cerberus at a discount, completing Cerberus鈥檚 exit from the capital structure. MPT has since increased its exposure to Steward through additional debt investments, culminating in yesterday鈥檚 $75mn DIP facility.

Now the question for MPT is whether Steward can resolve its capital structure issues in court sufficient to meet rent obligations听on reorganized properties. To that end, the听听of听HCR ManorCare鈥攏ow ProMedica Senior Care鈥攃ould prove instructive: The skilled nursing facility backed by Carlyle filed a prepacked bankruptcy after years of unpaid rent following a $6.1bn sale leaseback deal. The restructuring ultimately transferred ownership听to HCR landlord Quality Care Properties, which gave up its REIT status to complete the deal. AlixPartners’s John Catellano also served as chief restructuring officer to听HCR ManorCare.

Steward has two long-term leases with MPT under master lease agreements expiring in 2041, with nominal rent obligations stated at $6.6bn over the lease term. With 36 leased properties and a remaining lease term of 17.5 years, that equates to average annual lease payments of $10.5mn per property. In an alternative scenario, those 36 properties could become vacant and would have to be re-leased to new hospital tenants, making a massive dent in MPT鈥檚 balance sheet. As of Jan. 1, MPT switched to cash basis accounting for leases and loans with Steward, recording $700mn of total impairments on real estate and its 9.9% equity interest.

Risk Factor: Tenant Concentration

In addition to its exposure to Steward, MPT鈥檚 tenant base is concentrated in a high-risk corner of the healthcare market. The REIT鈥檚 business model primarily relies on sale-leasebacks of land and buildings with hospital and healthcare services counterparties. That means its tenant base is largely comprises operators opting to pursue such transactions, either through distress鈥攊n need of quick cash鈥攐r as a means of leveraging the balance sheet. The sale-leaseback model focuses MPT鈥檚 footprint and rent collection efforts on tenants particularly听vulnerable to adverse economic or regulatory events鈥攁s the Steward case aptly demonstrates.

MPT鈥檚 rental income is also concentrated among its largest customers. Its top five tenants occupying 127 properties contributed more than 50% of last year鈥檚 billed rent, namely Steward, Circle, Priory, Prospect, and CommonSpirit Health. The clustering at the top end means the failure of any single tenant has an outsize impact on MPT. Moreover, due to the unique nature of MPT鈥檚 assets, properties can be difficult and time-consuming to re-tenant, accessible only to similarly scaled healthcare groups that may be facing similar industry headwinds. That puts MPT on the hook to support its largest tenants in the event of distress via听flexible contract terms, rent deferrals, emergency loans and other concessions needed to ensure their survival.

The concentration effect is somewhat mitigated by diversification across geography and facility type. MPT has more recently expanded its footprint into Europe, where healthcare facilities are supported by stable government payors, which has the additional benefit of diversifying exposure across legal regimes. The REIT has also acquired听behavioral health facilities that tend to be steadier than acute care hospitals. Further, because operating facilities are essential to the day-to-day functioning of on-site providers鈥攁nd rent is a relatively minor line item for large healthcare groups鈥攔ent is often among the last of an operator鈥檚 costs to be cut.

Risk Factor: 2025 Debt Maturities听

With Steward鈥檚 $340mn annual rent听payment to MPT in jeopardy, the REIT is approaching $1.4bn of debt maturities in early 2025. Those consist of a $891mn GBP term loan scheduled to mature in January followed by $552mn of senior notes due in March. MPT reported $250mn of cash on the balance sheet and $286mn available on its $1.8bn revolver as of Dec. 31, ending the year with $536mn of total liquidity. A large chunk of the听$1.5bn outstanding on the revolver was likely paid down in听last month鈥檚 asset sale transactions, however, putting pro forma liquidity at around $1.4bn.

On the Q4 call held Feb. 21, MPT management outlined its plan to raise $2bn of additional liquidity this year through asset sales and secured financings. The two recent asset sale transactions made significant headway toward that target, generating $1.3bn of cash proceeds听used to pay down 2024 debt maturities along with the revolver. As a benchmark for a potential secured debt issuance, investors might look to听Diversified Healthcare Trust‘s听听in December, by which the healthcare REIT issued $941mn of 11.25% secured bonds to repay impending 2024 debt maturities.

For now, hospitals and other healthcare facilities across the听 continue to cope with the after-effects of the pandemic. Disrupted supply chains, inflated labor costs and declining reimbursement rates have proven stickier than anticipated industry-wide. At the same time, increased interest rates have driven up interest expense on floating rate instruments and driven down property valuations, reducing the proceeds of potential asset sales. Even after 2025 debt maturities are addressed, the company will face another $2.3bn of debt coming due in 2026, perhaps requiring a more comprehensive balance sheet solution.

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Despite addressing its front-end maturities that spanned 2024 to 2026 earlier this year via听new $2.05bn 11.75% guaranteed notes issuance and a $750mn draw on its revolver, CFO Marc Sirota hinted on the Q1鈥�24 call this morning that Altice plans to evaluate long-term options for its capital structure, with its leverage currently sitting at around 7x.

Sirota said, 鈥淲e will continue to be proactive in managing our debt maturities and evaluate how best to ensure that our capital structure supports our long-term operating goals. While we are well positioned in the near term, we are looking at all options to maintain a capital structure that supports our long-term strategic objectives.鈥�

Ahead of earnings and in anticipation of a potential balance sheet exercise, a group of creditors across tranches banded together with Akin Gump as counsel, sources said. Today, the consortium grew to a significant size as creditors consider next steps following management comments today and in light of听owner Patrick Drahi taking an aggressive stance听against investors during听Altice France鈥檚 Q4 call in March, according to sources.

One of the options under consideration is to offer deleveraging solutions given the debt trades at a discount, sources noted. Houlihan Lokey is also talking to certain creditors on evaluating options, sources added.

Debt issued via Altice USA鈥檚 CSC Holdings entity 鈥� which houses the company鈥檚 cable assets 鈥� was noticeably lower this afternoon, with its $2.05bn 11.75% senior guaranteed notes due 2029 changing hands at either side of 84, down from trades at either side of 88 yesterday. Its other series of $2.25bn 5.75% senior unguaranteed notes due 2030 fell to a 41.5-42.5 market, down from 44-45 yesterday and trades on either side of 50.5 a month ago.

On the loan side, Altice Financing鈥檚 TLB fell to an 88.5-89.5 market, from 90-91 yesterday, while CSC Holdings鈥� $1.98bn TLB-6 due 2028 (S+450) and $2.88bn TLB-5 due 2027 (L+250) were mostly unchanged on the news today.

鈥淲e do not see ATUS able to organically improve its credit metrics before the 2027 maturity wall and management dropped hints toward LME as it weighs options for its capital structure that 鈥榮upports long-term objectives,’鈥澨�草莓流氓视频听noted听in a report today.

鈥淟ooking at recovery values, we think the senior guaranteed notes are in the 90%-100% LTV bucket, with the unsecured notes largely impaired in a straight waterfall,鈥� wrote Head of Telecom/Media Davis Hebert and Analyst Savannah Buzzeo.

鈥淥verall, we would steer clear of the structure in general, for fear ATUS would look to be just as aggressive as in France to capture discount, although the company does have runway through 2027,鈥� the analysts concluded.

The company’s Q1鈥�24 adjusted EBITDA went down 2.5% year over year to $846.6mn while total revenue fell by 1.9% to $2.3bn for the quarter, both weak yet in line with expectations,听as reported.

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• The Fed held its policy rate steady at 5.25-5.50%, as widely expected.听The market had priced in virtually no chance of a cut at this meeting.
• The Fed added a sentence to the policy statement explicitly noting that it has not seen further progress toward its inflation target.听It also tweaked the statement regarding the risks to achieving its dual mandate, to recognize that risks are still better balanced over the past twelve months, but that progress slowed more recently.
• Quantitative tightening was tapered more than expected to a $25 billion monthly cap for Treasuries (from $60 billion previously).听The consensus call was for a cut to $30 billion per month. The runoff cap for MBS was unchanged.
• During Chairman Powell’s press conference, he made it clear the Fed is not considering rate hikes at this time.听The debate is just when rate cuts are coming, not if. He highlighted there are clearly scenarios where they could be on hold for a while, but the data will determine the outcome.

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JOANN鈥檚听听was confirmed today in the Delaware Bankruptcy Court, a swift 48 days after filing for bankruptcy. Judge Craig Goldblatt signed off on the order after debtor鈥檚 counsel Latham & Watkins indicated that the debtor received unanimous support from the voting creditors for the plan.

The 鈥渂espoke鈥� nature of the filing lies in the听, with the DIP lenders set to receive a significant 85% of reorganized JOANN as part of the DIP commitment fee when the DIP order was approved on an interim basis on March 19. The remaining equity will be distributed after confirmation today with 12.5% going to third-party DIP participants and the remaining 2.5% to prepetition term loan lenders.

The company鈥檚 prepetition ABL and FILO facilities, which amount to $28.4mn and $115.7mn respectively, will be assumed. The plan also involves converting the $132mn DIP claim into a new $153.4mn exit facility. The restructuring will effectively reduce the company鈥檚 prepetition debt of $1bn

Latham also informed Judge Goldblatt that JOANN currently has $107mn in liquidity, with an option to increase this by an additional $10mn through an accordion feature in its DIP credit agreement.

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He said the transaction market had “substantially dried out” in 2023, and expects the real estate market to pick up in Q2 2024. However, further price declines are anticipated during the second half of the year, he told callers.

The company generated gross proceeds from disposals of 鈧�530mn during 2023, with associated debt repaid of 鈧�270mn and net cash generation of 鈧�200mn. Adler has sold 1,150 rental properties during 2023, leaving the portfolio at 25,043 at year-end.

Adler’s gross asset value (GAV) for its yielding portfolio was听鈧�4.2bn at end-2023, down from听鈧�5.2bn at end-2022,听driven by both disposals and the portfolio revaluations. The like-for-like value drop was 12.8% during 2023.

Adler’s development projects had a GAV at 鈧�1.6bn at end-2023, meanwhile.听Last month, Adler closed the sale of the听Wasserstadt Tankstelle development project in Berlin, generating double-digit euro net proceeds.

Meanwhile, Beaudemoulin said he expects to close the sale of Adler’s 63% stake in BCP by the end of the year; an investment bank is running the sale process. As of December 2023, BCP owns ~9,300 rental units with a portfolio book value of more than 鈧�900mn, and ~鈧�180mn of development assets.

Adler’s cash at end-2023 was听鈧�377mn, including听鈧�105mn restricted cash mainly related to a temporary restriction at ADO Group Ltd (Israel), short-term capex and rolling interest reserves.

The company has 鈧�276mn of听2024 debt maturities, which refer almost entirely to asset-linked secured bank financing; extension negotiations are at an advanced stage and are expected to be agreed in Q2 2024.

Source documents:

As noted, Adler is in advanced talks with a SteerCo of bondholders about the restructuring, which听will improve the group’s cash position, postpone debt maturities beyond 2026/2027, and provide enough equity to ensure a “solid foundation” for going concern status for at least two years.

The non-binding agreement struck with the SteerCo would see some of the company’s debt extended and subordinated, and bondholders ultimately taking ownership control.

A lock-up agreement could be finalised as soon as next week, sources said, with consent processes to follow. Implementation could be via a UK court process, meanwhile.听Adler is targeting to complete the restructuring transaction by September this year.

The same advisors are in place for this fresh process: Adler is working with PJT and White & Case, and the SteerCo with Milbank and Hengeler.

In Adler’s restructuring process last year bondholders provided 鈧�937.5mn of first-lien 12.5% PIK funding due June 2025 and took 22.5% ownership. The funding was led by the SteerCo comprising BlackRock, PIMCO, Sculptor Capital Management, Silver Point Capital, Taconic Capital Advisors, and Schroders, which provided 80.3% of the听鈧�937.5mn new money, with other noteholders contributing the rest.

The new money was provided in return for preferential security over, and amendments to, the six unsecured bonds totalling 鈧�3.2bn maturing between 2024 and 2029. The 2024 bonds were extended to 2025, but the maturity dates of the 2025-2029 bonds were maintained. The new funding ranked first, followed by Adler鈥檚 2024 notes, convertible notes, and Schuldscheine second, with the remaining notes ranked behind.

Adler implemented the transaction via a UK Restructuring Plan, although the听听earlier this year after a challenge from a group of 2029 bondholders. Adler has since sought permission to appeal against the Court of Appeal verdict.

Adler’s bonds were little changed today, with the 2029s down nearly half a point at 37.125, according to Bloomberg pricing data.

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Private credit has grown immensely in recent years, and one recent focus has been the retail channel. How has that evolved?

Historically, if an investor wanted exposure to private credit assets, the access point was through a private fund that was only available to certain accredited investors and not retail investors. BDC structures have broken down barriers that previously prevented retail participation in private credit.

BDCs are regulated by the Investment Company Act of 1940 and provide strong investor protections, making them appropriate for retail clients. The first BDCs were all public companies, and if investors wanted to get exposure to the asset class and later get their capital back, they could buy and sell their BDC shares on a liquid, tradable exchange.

But what investors found is that market volatility could sometimes result in the stock trading below net asset value. So, what we’ve seen take place is the advent of a newer flavor of BDC that are perpetually private but do offer investors a modicum of liquidity on a quarterly basis through a tender process. Both public and private BDCs continue to be easily accessed by retail investors who are interested in the private credit value proposition.

Insurance companies also have unique needs in their investments, as commingled fund investments can result in inefficient capital management. How have they invested in private credit?

We鈥檝e seen insurance companies move away from investing through funds because of capital inefficiency, and we鈥檝e seen them move away from separately managed accounts due to operational inefficiencies.

Rated note structures are becoming increasingly popular for insurance companies looking for access to the asset class. Through these structures the asset manager does the hard work and heavy lifting of originating a portfolio of loans through an SPV that’s owned by one or more insurance companies.

Once the portfolio achieves the needed diversification, the manager can go to a ratings agency, and basically tranche out the exposure back to the insurance company. Through this process the insurance company can effectively recreate the underlying economics of owning the whole loans, but through a more capital efficient exposure on its balance sheets. Also, since the insurance company doesn鈥檛 own the whole loans on its balance sheet, it doesn鈥檛 have to manage corporate actions such as fundings and amendments, which creates operational benefits.

Has the rise of direct lending made it easier for institutional investors to embrace other strategies?

The expansion of direct lending has paved the way for new asset classes to also see a shift away from public markets to private markets access points. Asset-backed finance comes to mind for me. There’s been a high-functioning, public ABS market for decades.

But today what we’re seeing is, just like we saw in corporate credit, asset managers are disintermediating what was a bank-led origination model. Asset managers have captive and growing capital designed to hold the risk long term, which allows private originations to grow.

Banks and direct lenders compete for deals, but is the relationship more mutually beneficial than people might think?

I think it is. On the one hand, it’s definitely true that a deal placed to a direct lender is a lost fee opportunity for the leveraged finance department of an investment bank. But I think that simple observation ignores a number of different fee opportunities that get created for banks because of the existence of the private financing.

For example, that private direct lending deal may have facilitated an M&A transaction and fee that would not otherwise have happened because the syndicated market couldn鈥檛 finance the deal. Also, it鈥檚 likely that a bank had a role in raising either the LP capital or the leverage for the direct lender鈥檚 portfolio, which also resulted in a new revenue opportunity for that bank.

So, I think that the different direct lending driven opportunities that banks benefit from creates a more symbiotic relationship between the parties than you might otherwise have believed.

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