EMEA Private Credit Review: Sep 21

Editor’s Note: This weekly report encapsulates market information, data and commentary relevant to private debt investors and professionals in Europe. We include a curation of Octus’ proprietary journalism, with links to unverified third-party press reports and primary sources. For access to our deal origination pipeline of private credit and M&A transactions, click HERE.

“Some lawyer at some point made up this concept, and it seems to have embedded itself. It’s actually very rarely utilized,” said Stuart Mathieson of Barings, talking about PIK toggle on a panel at IPEM last week. He acknowledged that PIK toggles show up in the vast majority of European deals, but said borrowers almost never pull the lever, because in most cases doing so doesn’t help the IRR and is too expensive relative to the liquidity it actually frees up.

However, data from Lincoln International’s European Private Market Index does show that usage is increasing. PIK usage rose to 16.7% in Q2, up from 16.1% in Q1, and “bad PIK” that is used to paper over underperformance rather than support growth, ticked up from 7.9% to 8.1%.

Michael Carruthers of Blackstone pushed back on the idea that so-called “bad PIK” is always bad. “Bad PIK is the frustration for myself and probably others in the industry because it’s characterized as the industry intentionally masking defaults, and it’s the complete opposite,” he said.

He highlighted that it is almost always used alongside fresh equity injection from the sponsor and tighter controls: “They put in a lot of equity. You may give some flexibilities and PIK. You may get a board seat.” He also highlighted cases where things have worked out. “We’ve had several companies that have ‘bad PIK’ that actually perform really well. Sponsors put in equity, they turn things around, they have more time, and they recover”. Although he did concede that there are certain scenarios where lenders should be worried: “You do not want to have a PIK that was not part of the day one documentation. Something’s gone wrong to have to do that years down the road.”

Tom Maughan of Bain Capital located the current wave of stress squarely in vintage, not structure. “The watchlist number of names has been pretty consistent over the past three or four years,” he said, tying it to “2021 vintage transactions that went through COVID,” where equity support and covenant relief bought time that hasn’t always translated into a fixed balance sheet. He also does not see it as systemic: “It’s idiosyncratic. It’s not one theme.”

Mathieson drew a firm line between PIK-as-crisis-response and PIK-as-negotiated-support. Describing a typical amendment, he said lenders might agree to keep the minimum cash pay interest at 400 bps over the reference rate and offer some flexibility, but like Carruthers he highlighted the significant equity support, which ultimately goes to your collateral and reduces your longer term default risk.

Read together, the panel and the data aren’t necessarily in conflict. PIK toggles remain rarely triggered, but the minority of cases, where it is triggered, look to be getting more stressed with lenders increasingly willing to take control rather than wait it out.
 

Arcmont is providing refinancing and add-on facilities for Dutch real estate software provider Zig.

Barings, Bridgepoint and Pemberton financed Inflexion’s acquisition of German medical supplier Primed.

Crescent Capital has financed Armira’s acquisition of Dutch ERP software business Itsperfect.

Investec is financing Bencis’ acquisition of Dutch vehicle protection business Allsetra.

Pictet is financing Weinberg Capital-backed French accounting business Summa.
 

PSG Equity has held a final close of its third European PE fund at €4.4 billion.

Amundi has acquired a 9.9% stake in ICG.

Portobello Capital has held a final close for its fifth PE fund at €710 million.
 

Golub has hired Matt Shafer as head of Golub Equity Continuation Partners to lead the firm’s GP-led private equity secondaries strategy.