2019_02_09 — “A Credit Fund That Stands Apart”

February 9, 2019

A Credit Fund That Stands Apart

A credit fund that stands apart

The private debt market has blossomed since the great financial crisis (and will soon reach $1 trillion). We’ve looked at many flavors of credit funds and found only a few positive standouts. With that in mind, I believe that the XYZ Fund (XYZF) is notable [Note: the name has been disguised to protect confidentiality].

XYZF is a credit fund that will provide business loans aimed at stressed markets; therefore the team from the outset takes the point of view or mindset that each financing may be a stressed/distressed loan and builds in the necessary return parameters and precautions. The idea is to create a stressed/distressed fund that takes advantage of all the covenant light debt that has been issued over the last several years and create secured and advantageous pricing or debt that is ahead (in the capital structure) of previously issued senior and mezzanine loans. XYZF is led by the [person] that previously led credit and distressed debt at [another notable firm]. I believe X’s network will allow them to put cash to work in a timely manner.

XYZF will tend to invest in businesses undergoing stress or transformational change — with rescue direct lending, opportunistic financing, or recapitalization solutions — i.e., a company challenged by one or more of the following:

• Business model or management team experiencing significant transition
• Industry is out-of-favor with the capital markets or undergoing secular or cyclical change
• Liabilities have become cumbersome or unsustainable

Along with capital, the Fund will also provide leadership, flexibility, and support that can empower management to achieve transformational change by investing in the business, improving cash flows, reducing leverage and returning the business to corporate health. The Fund additionally plans to opportunistically invest in public market stressed/distressed debt or post-reorganization equity.

XYZF will seek to provide appreciation with meaningful market cycle downside protection through private transactions complemented by opportunistic public market investments. The strategy is positioned at the intersection of X’s private equity, lending, and credit teams in order to benefit from private market sourcing, deal flow, credit trading opportunities, and proprietary industry research. Sectors that account for the largest share of debt growth in a bull market or have the highest leverage often have the largest problems when the cycle turns. The team foresees opportunities driven by disruption and dispersion in healthcare, telecom, specialty retail, consumer products, media, and energy.

In the benign environment of the last two years, the team has deployed over $1 billion. Near term potential pipeline opportunities include:

• Media: provide capital to a media company to reduce debt and interest burden and allow an upgrade to digital displays which can have cash on cash returns of +20%
• Consumer products: provide refinancing for management’s plan to transition from a vertically integrated food manufacturer to an asset light model with outsourced manufacturing
• Energy: attain a control position in an east coast power plant through a debt for equity conversion
• Telecom: provide financing for higher margin capex investments (e.g., laying fiber in lines that only have copper)
• Specialty retail: acquire ownership of a retail chain’s intellectual property assets through claims on the bankruptcy estate

XYZF details:

• [confidential]

Consider discussing with your trusted advisor how private credit may help your portfolio.

Michael Ashley Schulman, CFA

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Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The views and opinions referenced are as of the date of initial publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each person’s or investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.