Some direct lending funds are seeing an growing portion of their earnings come from payment-in-kind (PIK) funds, specialists say.
Scores company Fitch not too long ago issued a report that confirmed that eight per cent of direct lending enterprise growth firm earnings within the US was derived from PIK earnings.
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Principal Asset Administration, in a subsequent examine, discovered that a fair increased 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, advised Different Credit score Investor.
He identified that the rise in curiosity is because of two components: 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 increased leverage to compete towards the reopened broadly syndicated market.
Learn extra: Brookfield Oaktree says payment-in-kind development is “price monitoring” for dangers forward
“This increased 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 surroundings and with valuations going through downward strain, he mentioned the agency prefers to concentrate on the decrease and core center market, the place PIK toggles are far much less frequent and coupons are paid in money.
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In response to one funding banker, PIK parts have been narrowing however they’re nonetheless extra prevalent than earlier than fee rises began. Nonetheless, the banker famous that they’re seeing decrease spreads supplied 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 slightly than that of the working firm.