LevFin Insights | U.S. Private Credit: Devil in the Default Details—Amendments, LMEs Mask Private Credit Default Rate, Lincoln Data Show

Jun 2024

Originally posted by LevFin Insights on June 26, 2024.

Inflated interest rates and increased financial pressures on private companies have triggered a rise in creative approaches to avoid defaults.

According to Lincoln International’s proprietary data, covenant default rates decreased for the fourth consecutive quarter to 2.7% in Q1 2024. This LSTA leveraged loan default rate also fell to 1.3%.

“Sponsors, borrowers and lenders are getting ahead of defaults and are solving for the default through an increase in amendment activity,” Christine Tiseo, co-head of Lincoln’s Capital Advisory Group, commented.

Lincoln’s data has shown that amendment activities such as payment in kind interest and covenant holidays were implemented to proactively combat defaults; 15% of companies that Lincoln values addressed this in the 12 months ending in Q1 2024.

Christine said, “As long as you solve for liquidity issues through a small equity injection to get to the other side, lenders will be favorably inclined to amend.”

Despite these maneuvers, many companies still face formidable debt-to-EBITDA ratios and lack sufficient cash flows to cover. In Q1 2024, approximately 40% of companies in Lincoln’s database had fewer free cash flows than total debt service obligations with a less than 1.0x fixed charge coverage ratio.

“It shows there’s more work to be done to clean up broken balance sheets,” Christine added.

Learn more in the original article.

Summary

  • Lincoln International’s Christine Tiseo highlights creative approaches leveraged to prevent defaulting amidst increased interest rates and financial pressures.

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