Private Credit Stress Is Playing Out Beyond Bankruptcy

The private credit stress test that you read about in headlines isn’t showing up in the typical rush of bankruptcies. We at G2 Capital Advisors are seeing the rise in private credit defaults play out through increased distressed sales to strategics, insolvencies and wind-downs through state-level assignments for the benefit of creditors, and selective debt-to-equity restructurings paired with long-term operational turnarounds. 

Consistent Themes Across Distressed Situations

Regardless of industry, the patterns in new distressed situations are consistent across a couple main themes:

1. Immediate cash pressure driven by higher interest rates, overleverage, and operational and cost structure challenges is forcing reluctant stakeholders to exit via sale or wind-down to stem further bleeding.
2. Lenders less willing to extend 2021-vintage maturities, combined with sponsors less willing to write yet another check to support the Company, are leading to near-term marketing processes.

Private Credit Behavior Is Not Uniform

How stakeholders handle these dynamics is not uniform. Scale, resourcing, internal marks, and sponsor relationships often play a bigger role in driving private credit behavior than credit fundamentals.

Large, well-resourced direct lenders with in-house workout resources behave very differently through default negotiations than smaller shops that increasingly outsource. Lenders with strong sponsor finance franchises often take much more passive approaches, acknowledging the broader sponsor relationship.

We often see lender-side FA support as a critical lever for lenders to augment internal teams and drive more aggressive discussions with borrowers, boards, and PE owners. At the same time, debtors who bring in help earlier can often extend runway and catalyze critical decision-making with lenders before liquidity constraints negatively impact strategic alternative outcomes.

Certain lenders are looking to outsource longer-term operational repositioning to hands-on advisory firms, with more aligned fee structures.

Looking Ahead: The next year will prove to be a busy one in private credit special situations.