Inside the Blood Sport of Creditor-on-Creditor Violence
Nov 25, 2024
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Sujeet Indap, Wall Street Editor at the Financial Times and author of The Caesars Palace Coup, dives into the intense world of creditor-on-creditor violence. He reveals how the rise of 'cov-lite' loans has led to fierce competition among investors scrambling to recover their stakes from distressed companies. Indap discusses the legal battles increasing costs for big players, the crafty loopholes exploited by hedge funds, and offers insights into the complex dynamics of leveraged loans and private equity during financial unrest.
The rise of 'cov-lite' deals has led to increased creditor-on-creditor violence, with larger lenders exploiting their influence against smaller ones.
Private credit's emergence as a major financing player presents a new landscape where even collaborative frameworks can still foster conflicts among creditors.
Deep dives
Understanding Creditor-on-Creditor Violence
Creditor-on-creditor violence refers to the conflicts that arise among lenders when a borrowing company faces financial distress. In such situations, lenders with larger stakes may manipulate their influence to secure better terms at the expense of smaller lenders, even though they are ostensibly governed by the same agreements. This newly nuanced conflict highlights the disparity among lenders that may not have been as pronounced in the past, especially as leveraged loans have become predominantly covenant-light, providing companies with more restructuring flexibility. The dynamic has shifted, leading to a scenario where larger creditors can impose their will on the distribution of a limited financial pie, leaving smaller creditors at a disadvantage.
The Rise of Private Credit and Its Implications
Private credit has emerged as a significant player in the financing landscape, especially as traditional banking activities have been curtailed post-financial crisis. This segment allows single lenders or small groups to provide capital directly to companies, reducing the chances of creditor infighting seen in larger syndications. Despite its collaborative framework, creditor-on-creditor violence is still surfacing in private credit deals, albeit in milder forms. The relative newcomer status of private credit means its rules and practices are still evolving, as evidenced by cases where existing lenders have reacted swiftly to refinancing transactions they deemed aggressive.
Legal Nuances and Document Standardization
The legal documentation that governs creditor agreements is far from standardized, as lenders and law firms evolve to tackle increasingly complex financing structures. This trend leads to an 'arms race' where legal creativity allows for multiple interpretations of agreements, often creating loopholes that facilitate creditor-on-creditor violence. The negotiations around these documents can be highly intricate, with lenders utilizing specific terms and conditions to gain leverage in disputes. As a result, the language used in these documents can significantly influence lender behavior and their ultimate negotiating power, complicating relationships among creditors even further.
Impact of Legal Costs on Investment Returns
The rising costs associated with legal services in the context of distressed debt and complex financial transactions have sparked concern among investors about their diminishing returns. High legal fees in cases involving creditor-on-creditor conflicts can erode profits, affecting the overall efficiency of capital markets. This financial pressure prompts investors to reconsider their engagement in certain market segments and leads them to seek tighter documentation to safeguard their investments. As the competition for capital increases, market players are becoming more aware that excessive legal wrangling can detract from their potential earnings, leading to calls for changes in legal practices and contract negotiations.
In the Zirp era of the mid-2010s, credit markets were booming and investors were clamoring for anything that would produce yield. So they were willing to accept fewer legal protections embedded in bond and loan documentation if it meant they could get a slice of a juicy deal. Today, the proliferation of these so-called "cov-lite" deals has been coming back to haunt the market, with investors now fighting each other over how much they can claw back from struggling companies. Some hedge funds have become incredibly creative when it comes to finding loopholes to exploit in deal docs. So what exactly is "creditor-on-creditor violence" and why has it become such a thing? How much is it adding to big investors' legal bills? And what can be done to reduce all the squabbling? We speak with Sujeet Indap, Wall Street Editor at the Financial Times and author of The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Corruption of the Private Equity Industry.
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