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Some direct lending funds are seeing an growing portion of their earnings come from payment-in-kind (PIK) funds, specialists say.
Rankings company Fitch not too long ago issued a report that confirmed that eight per cent of direct lending enterprise improvement firm earnings within the US was derived from PIK earnings.
Learn extra: Carlyle and Goldman Sachs make investments $1.1bn in Apex Group’s PIK notes
Principal Asset Administration, in a subsequent examine, discovered that a fair larger share this yr is from PIK earnings, “demonstrating this development has solely additional elevated this yr,” Matthew Darrah, head of underwriting for direct lending at Principal Asset Administration, informed Various Credit score Investor.
He identified that the rise in curiosity is because of two elements: legacy portfolio firm points that had been levered to perfection previous to rate of interest rises, and the growing variety of new platforms with PIK toggle transactions seen within the higher center market, the place lenders are providing larger leverage to compete towards the reopened broadly syndicated market.
Learn extra: Brookfield Oaktree says payment-in-kind development is “value monitoring” for dangers forward
“This larger leverage can’t be supported if debtors needed to pay in money, and so as an alternative, these lenders have allowed for PIK,” he added.
In a excessive rate of interest atmosphere and with valuations dealing with downward strain, he mentioned the agency prefers to concentrate on the decrease and core center market, the place PIK toggles are far much less widespread and coupons are paid in money.
Learn extra: S&P: Rising defaults will check asset high quality of personal credit score funds
Based on one funding banker, PIK parts have been narrowing however they’re nonetheless extra prevalent than earlier than price rises began. Nonetheless, the banker famous that they’re seeing decrease spreads provided within the PIK realm.
The banker additionally reported situations of restructuring debt to PIK or introducing them throughout negotiations round covenants.
PIKs are additionally being launched into the holding firm’s stability sheet quite than that of the working firm.
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