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135 borrowers, $9 billion in writedowns

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We’ve written before about the credibility gap around private credit fair value marks, and whether managers were carrying them too high. In the first quarter, managers answered by cutting marks far faster than in prior quarters. Across the entire BDC industry, fair values fell by over a point sequentially, implying over $6 billion of value destruction across all BDC portfolios. However, digging deeper, meaningful writedowns were concentrated in large issuers and many of the large writedowns were from holdings in broadly syndicated loans.

Driving those declines, the number of large writedowns – greater than 15% – jumped in the first quarter. According to Octus’ latest analysis, managers wrote down loans from 135 borrowers, covering $9 billion in principal, against 86 loans and $1.7 billion in the fourth quarter. Taking cues from the public markets, Q1’s writedowns share a few characteristics:

  • Software dominated. Technology companies accounted for $5.7 billion of debt across 48 companies, most of them software. Healthcare followed, with $1.2 billion of principal cut by more than 15% sequentially.
  • The largest writedowns hit the largest holdings. Of the $9 billion in principal in our report, $5 billion sat with just 20 issuers, 13 of which carry debt that is widely held and publicly traded.
  • Fair values fell even as portfolios grew. Private credit fair values, based on BDC reporting, declined sequentially even as portfolio assets grew on a cost basis. The writedowns also pushed leverage higher in the quarter.

That concentration points to more negative headlines, following Medallia, now a well-known private credit story amid restructuring talk. Other large writedowns this quarter include Discovery Education, Affordable Care Group, PathGroup and Pluralsight.

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