After riding the relentless credit boom of the past decade, some of the biggest players in the $1.4 trillion private credit market are now amping up hiring of restructuring pros as they brace for an uptick in defaults.
Firms including Barings and HPS Investment Partners are beefing up their teams of workout specialists, who have expertise in managing investments during a downturn, as rising interest rates and a darkening economic climate take their toll on corporate America.
Blackstone Inc. and Bain Capital have been adding in-house restructuring experts and assigning more distressed-credit responsibilities to existing employees over the past year or so, according to people with knowledge of their strategies, who asked not to be identified as the details are private. Both companies declined to comment.
“Getting the right number of people with the right experience can be tough heading into the unknown,” said Salman Mukhtar, managing director at Barings, in an interview. “Everyone who thinks they are adequately staffed probably isn’t.”
Mike Patterson, a governing partner at HPS, also said his firm has been bolstering its workout team as it sees potential stress on the horizon.
So far this year, the volume of defaults in the direct-lending market has reached $1.7 billion, as data compiled by KBRA Analytics shows, with weight-loss company Jenny Craig Inc. becoming the latest to crumble earlier this month.
While that pales in comparison to the $17.4 billion of defaults seen by KBRA in the syndicated loan market, some 75 percent of private credit executives surveyed by law firm Proskauer Rose expect defaults in their portfolios to rise over the next year. It’s the biggest expression of bearishness in the past five years.
Wall Street firms are increasingly willing to pay up for talent. A restructuring managing director at a bank can earn about $2.7 million annually, while a senior managing director can earn more than $4 million, according to Alan Johnson, president and founder at Johnson Associates, a compensation consultancy. Those figures include salary, cash bonus and deferred and equity compensation.
“With such a high demand for restructuring experts, no one will move for a 10 percent bump in salary,” said Todd Downing, managing partner at recruitment firm Best Human Capital & Advisory Group. “They are requiring around 25 percent or more, with a promotion.”
Levers to Pull
Private creditors typically hold the majority of a company’s debt, giving them a significant vested interest in preserving the value of their positions when credit conditions tighten. They can deploy various strategies to encourage the sponsor to keep the business out of bankruptcy, where the tab for lawyers and advisers easily runs into the millions.
“Year-to-date, we’ve seen six out of the approximately 300 private companies we cover avoid bankruptcy by working with private lenders to restructure cash interest or principal payments,” said Lyle Margolis, head of private credit at Fitch Ratings. “That’s nearly as many as we saw all last year.”
Since private credit funds tend to have a closer relationship with private equity sponsors, they are often in a better position to handle workouts than their public credit counterparts. Private credit firms often opt for “out-of-court” restructurings, which means the process takes place entirely behind closed doors.
“Refinancings are becoming more expensive and tighter conditions are making it increasingly difficult to reach sufficient consensus on viable out-of-court transactions,” said Stephen Hessler, who leads Sidley Austin’s restructuring group. That means an uptick in restructuring work generally and in Chapter 11 cases specifically, he said.
