Q2 Private Credit Restructuring Transactions Average About 50% Recoveries for Senior Lenders; In-Court Transactions Result in Greater Debt Reduction

Relevant Items:
Q2’25 BDC Nonaccrual Report
Q1’25 BDC Nonaccrual Report
 

• Octus identifies and analyzes 26 private credit restructuring transactions or distressed sales in the second quarter. Average out-of-court and in-court restructuring transactions resulted in approximately 50% recoveries. In-court transactions resulted in larger debt reduction on average than out-of-court transactions.
   
• Distressed sales and wind-downs resulted in little to no recovery for lenders.
   
• Overall effect on BDC balance sheets from second-quarter restructurings was minimal due to previous fair value write-downs taken by the BDC lenders.
   

As part of Octus’ review of nonaccrual loans, we identified loans removed from nonaccrual status sequentially and found that the vast majority of loans removed from nonaccrual status either restructured during the second quarter, were sold at distressed levels or the businesses wound down. Octus identified and analyzed in this report 26 companies that restructured their capital structure or were sold at distressed levels during the second quarter.

As detailed in the table below, 50% of loans analyzed were restructured in court or out of court with average stated recoveries on loan principal of approximately 50%. Notably, out-of-court restructurings yielded a slightly higher recovery and resulted in less of a reduction of principal on the restructured debt.

The sale of businesses and the wind-down of assets resulted in little to no reported recovery on principal.

In total, in-court and out-of-court restructurings, including distressed sales, resulted in average recoveries based on reported fair values on principal ranging from 30% to 50%.

A summary of the restructuring transactions or distressed sales, including aggregate recoveries on reported principal, is below:
 

A breakdown of the 26 transactions is detailed below:
 

Reorganizations and Going-Concern Restructurings

As noted above, borrowers pursued both in-court and out-of-court restructurings during the second quarter. Interestingly, average recoveries for first lien lenders were similar, at about 50% of principal, according to business development company reports. The three chapter 11 situations, shown in the table below, each emerged from chapter 11 during the second quarter. Mitel Networks and Wellpath, while held by BDCs, both issued debt broadly syndicated and widely held by institutional investors. Mitel filed for chapter 11 this March, and Wellpath filed for chapter 11 last November.

Zips Car Wash, which filed for chapter 11 in February, was largely held by a consortium of direct lenders, led by Brightwood Capital Advisors and HPS Investment Partners. In total, the lender group, which held 100% of prepetition term loan claims, counted eight members. Prepetition lenders, as part of the plan, agreed to fund $30 million in new-money DIP term loans, which were paid in full in cash at emergence. In exchange for the approximately $650 million in prepetition term loan claims, prepetition term lenders received $375 million in take-back debt and 100% of the pre-dilution equity. Leading up to the chapter 11 filing, Zips said it engaged with an ad hoc group of term loan lenders, represented by Paul Hastings LLP, and separately a group of senior preferred equityholders, represented by Sidley Austin LLP, on a potential new-money capital solution. Zips also consulted with the sponsor, Atlantic Street Capital, on continued management of the company and additional potential liquidity solutions. Approximately $300 million of preferred equity, including $70.8 million of junior preferred equity owned by Atlantic Street Capital, was outstanding as of the petition date. However, the company did not disclose the senior preferred holders. None of the BDC lenders analyzed by Octus disclosed preferred equity holdings.

Octus identified nine private credit situations that restructured out of court including debt-for-equity exchanges and below-par debt for debt exchanges. Many of the out-of-court restructurings included both debt-for-equity and distressed debt exchange transactions resulting in a reduction of debt and an extension of remaining debt maturities.

Average recoveries as reported by BDC lenders were 54% based on reported fair value of all positions as of June 30 calculated as a percentage of March 31 principal. Fair values range from 12% to 91%. All but one of the nine out-of-court restructurings included a partial debt equitization, and debt exchanges on remaining principal resulted in two-to-seven-year maturity extensions as compared with debt prior to the transactions.

Octus previously discussed AllClear’s partial equitization and extension of maturities. We estimate that lenders to AllClear Aerospace and Defense swapped approximately 25% of principal due 2025 in exchange for a controlling equity stake in the company. Lenders also exchanged their 2025 loan for three new series of term loans all maturing in 2030. The debt-for-equity swap also included an infusion of cash to help “significantly deleverage” the company’s balance sheet and “support the next phase of growth and profitability,” according to a press release.

JobGet entered into a debt equitization agreement with lenders during the second quarter. Runway Growth Finance reported owning $3.7 million in term loan principal due Nov. 16, 2025, in addition to preferred equity with a fair value of $26.7 million plus warrants to purchase additional preferred shares. As of June 30, Runway no longer reported holding the term loan and instead reported additional preferred shares as well as a new $1 million convertible note, which the company said was issued on June 24. Interestingly, the convertible note has a maturity date of Sept. 22, 2025. On June 24, JobGet entered into an asset purchase agreement with CareerBuilder for the purchase of the company’s job board business. Through Octus’ coverage of CareerBuilder’s bankruptcy cases, it was learned that JobGet acquired the CareerBuilder + Monster job board business for $7 million.

Distressed Sale Transactions

As noted above, sale transactions or wind-down of businesses resulted in little to no recovery for lenders. Interestingly, Octus identified two transactions that resulted in the restructuring of debt and subsequent sale of assets in which lenders exchanged their debt for equity in the purchased companies. That report can be found HERE.
 

For each transaction in the table below, Octus lists the cost and fair value of debt listed by BDC and compares it with total investments, at cost and fair value.
 

Certain BDCs, when combining individual transactions, had a larger hit from restructurings in the second quarter on the investment cost line, but the effects on fair value were minimal because of prior write-downs.