To manage increased risk in struggling companies, lenders are moving beyond simple repricing. They are creating novel hybrid capital instruments, like 'debt like PREF' or securities tied to EBITDA growth, which preserve debt protections while capturing equity-like upside for the lender.
Contrary to some views, Liability Management Exercises (LMEs) are not dead but have evolved into a standard market product, particularly in the broadly syndicated loan (BSL) market. Their use is less common in private credit, where lender-sponsor relationships often take precedence over aggressive financial engineering.
In the middle market, especially with family-owned or founder-led businesses, private credit lenders often act as the first institutional capital provider. This role extends beyond lending to providing operational guidance and resources, functioning more like a strategic partner to help the business mature.
A once-buried clause in security agreements allowing lenders to 'flip the board' upon default has become a critical remedy and a key point of negotiation. Lenders now focus intently on the required notice period, with some refusing deals that don't allow for immediate action.
When lenders exercise their right to take board control, the standard playbook is to immediately appoint an independent director. This person's fiduciary duty is to maximize the company's value for all stakeholders, providing a crucial legal defense against potential lender liability lawsuits.
The current credit cycle is in its middle stages—the '5th inning.' The initial phase is over, and the 'starting pitcher' (original lenders and their counsel) is being pulled. Specialized restructuring advisors are now being brought in as 'relievers' to manage increasingly complex workout situations.
Private credit funds have evolved. Many now possess in-house, private equity-style management teams, making them more comfortable with taking ownership of a struggling company and turning it around, a departure from the traditional lender playbook.
Payment-in-Kind (PIK) interest can be a strategic tool for healthy companies to fund growth ('good PIK') or a sign of distress when a company can't afford cash interest ('bad PIK'). Publicly available data, like BDC filings, fails to distinguish between the two, masking true portfolio health.