JF Lehman & Co.’s Evan Lederman Expands on Ramifications of Abundant Capital Raised in Private Credit, Sees Ample Opportunities to Deploy Capital Despite Macroeconomic Turbulence

By Patrick Fitzgerald

The convergence of public broadly syndicated loan and private credit markets is another consequence of the abundant capital raised in private credit over the past five years, according to Evan Lederman, partner and co-head of credit at J.F. Lehman & Co., or JFL, a sector-focused investment firm that manages roughly $10 billion across private equity and credit. The JFL credit strategy is secondary-focused, purchasing debt at an average dollar price of $75 from nonfundamental sellers in need of liquidity or who are not equipped to deal with any operational and/or balance sheet complexities in sectors where JFL has differentiated expertise.

Even just three-and-a-half years ago, when JFL launched the JFL Credit business, spreads between syndicated public and private loans were 300 bps to 500 bps wider for private loans, and “you could get these amazing things called financial covenants in private direct lending deals,” Lederman told Octus. “But the enormous amounts of money that has poured into direct lending led to a race to the bottom as lenders fought for origination, compressing spreads and eliminating most of the premium in private credit along with covenants and protections in private credit agreements.”

“And that’s not even mentioning how absurd EBITDA adjustments have gotten in many documents, where now we have seen even things like rent and lease expenses excluded,” he stated. “So you see elevated headline leverage across the market, but it’s even worse when you factor in additional ‘shadow leverage’ from manipulated financial metrics allowed under lots of credit documents.”

With respect to private credit workouts, however, Lederman thinks direct-lending situations that his firm steps into on a secondary basis provide for a much better setup to effectuate change and achieve better outcomes. This is due to several factors, he said, including a smaller lender base that allows them to work more closely with company management to improve the situation, the nonpublic aspect of private credit providing for more discretion with respect to outcomes, and that private credit is more sponsor heavy, so you are dealing with a single owner and not a management team beholden to a disparate shareholder base.
Lederman also expanded on the growing trend of the firm’s sourcing and investments coming from business development companies and direct lenders in need of liquidity to meet rising redemptions and/or margin calls.

“This is a big change from the past five years when BDCs, like direct lenders, were taking in massive inflows of capital, and their main issue was how do they deploy all the cash they were raising,” Lederman said. “In our opinion, this compromised both underwriting standards and credit protections for many managers as they fought for allocation/ability to deploy above all else.”

It also led to poor diversification as tech and software names dominated the borrowing landscape, Lederman explained, leading to high concentrations in many BDCs, “where we see 25% or more of BDC portfolios in the asset-light software sector.”

In software credits, where J.F. Lehman does not invest, investors often rely on operating company multiples as their only “collateral,” Lederman said, with senior credit lenders really being the senior equity in these situations in a down case but without the same equity upside. As such, Lederman further explained that the recent blowup in software was extremely painful to BDC managers and also exposed a curious discrepancy in marks / net asset values between publicly traded BDCs, which are marked to market, or MTM, and nontraded interval fund BDCs, which are manager marked.

“Even though traded and nontraded BDCs shared many overlapping positions, especially across the software sector, MTM public BDC equity started trading at big discounts to NAV to reflect the drawdown in software names – yet the manager-marked BDCs somehow showed limited or no markdowns or even markups in some cases,” Lederman said. “Both cannot be true at the same time.”

Accordingly, many BDC investors lost faith in the quality of marks and concentrated exposure across asset-light, volatile sectors and have rushed for the exits, especially since redemptions in nontraded BDCs are at manager-marked NAV, Lederman explained. So investors exiting wanted to get to the front of the line while nontraded BDCs’ NAVs remain inflated, he added, causing a run on the proverbial BDC banks, and managers were only saved by putting up their gates to limit redemptions to 5% to 7% per quarter.

“At 5% to 7% running redemptions (plus margin calls), BDCs are now looking to raise cash by selling the names they can often in J.F. Lehman’s sectors because software loans either have no bids or managers would rather not sell at fire sale prices,” Lederman said. “So, for us, debt of higher-quality names in our sectors of aerospace, defense, government, infrastructure, industrials and environmental services are coming for sale at an increasing pace and providing us with an emerging opportunity set.”

As for the back half of this year and into 2027, J.F. Lehman & Co. is not sitting on its hands and playing defense despite the ongoing turbulent macroeconomic backdrop.

“We are playing offense thanks to skill and certainly some good luck – our returns have been very strong, and our opportunity set continues to grow so we are successfully raising capital and growing our credit business,” Lederman said. “[There’s] some luck with respect to our sectors of focus truly shining in this macroeconomic backdrop as probably the best place to allocate capital.”

Aerospace demand, Lederman continued, is at all-time highs, with backlogs at Boeing and Airbus nearing 15 years for new plane orders as well as insatiable demand for engines (industrial gas turbines) to power data centers.

In addition, global defense spending is at all-time highs and growing, given dramatically increased geopolitical uncertainty and conflicts, and infrastructure and industrials are benefiting from onshoring of supply chains and massive government spending from the trillion-dollar-plus Infrastructure Act, and environmental services remains a stable, noncyclical grower.

“Given our secondary- and sector-focused approach, this is the best opportunity set we have seen in the past 20-plus years,” Lederman said.
 

JetBlue

Legal and financial advisors specializing in capital structure solutions have approached creditors of the low-cost carrier with ideas ahead of a Monday, Aug. 3, investor meeting the airline has invited creditors to, at which it could gauge the investors’ appetite for providing additional liquidity. JetBlue reported a second-quarter net loss of $247 million, even as revenue rose 14.5% to $2.7 billion, with quarterly EBITDA of $42 million leaving first-half EBITDA at negative $3 million against $8.5 billion of total debt and $1.66 billion of cash.

CFO Ursula Hurley said quarter-end liquidity stood at 23% of trailing 12-month revenue, above the 17% to 20% target range, highlighting that if the company needs liquidity in the second half, its first move will be to pull down the $250 million accordion under its recent $500 million secured aircraft financing, followed by further aircraft financing. A bond deal backed by unencumbered slots, routes and gates plus a lien on the loyalty program was floated in May but never launched. The 9.875% TrueBlue loyalty senior secured notes due 2031 last traded at 87.5, down from 90 a month earlier. Octus’ coverage of JetBlue is HERE.

Interior Logic Group

The Blackstone-backed flooring, cabinet and countertop designer and installer is discussing a potential liability management exercise with lenders that could combine new-money, below-par debt exchanges, maturity extensions, and some equity for creditors, as higher mortgage rates weigh on building products demand. The company is working with Kirkland & Ellis and Guggenheim Partners, while an ad hoc lender group has Gibson Dunn and Greenhill as advisors. The first lien term loan B has fallen to 61 from 74.93 three months ago. Octus’ coverage of Interior Logic Group is HERE.

Loparex

The Pamplona Capital Management-backed manufacturer of silicone release liners is negotiating a restructuring support agreement with certain lenders that may be effectuated through a chapter 11 filing after missing a series of interest payments. Goodwin is advising the company, while certain lenders are working with Akin Gump, and we had previously reported the company was consulting with PJT Partners to evaluate options after a private credit refinancing attempt failed. The capital structure includes about $9 million of pre-exchange first lien term loans due August 2026, roughly $730 million of superpriority first lien term loans due February 2027 and about $164 million of second lien term loans due August 2027, and the company has missed a scheduled payment on every tranche. The SOFR+450 bps first lien term loan B due 2027 is quoted at 91.92, roughly flat over three months. Octus’ coverage of Loparex is HERE.

Groupe Solmax

The Fonds de Solidarité FTQ and La Caisse-backed geosynthetics manufacturer is considering a private credit refinancing of its near-term maturities. Octus had previously reported that lenders had been in touch with lawyers specializing in liability management and restructuring. The term loan has recovered to 92.97 from 80.25 three months ago. Octus’ coverage of Groupe Solmax is HERE.

Tungsten Automation

The TA Associates and Clearlake-backed document automation software provider, formerly known as Kofax, is exploring liability management options to reduce leverage, boost liquidity and extend debt maturities. The company is working with Simpson Thacher and Evercore, while lenders have organized under a cooperation agreement prepared by Gibson Dunn, citing high financial leverage and a looming June 2027 revolver maturity. TA Associates and Clearlake. Octus’ coverage of Tungsten Automation is HERE.
 

Dye & Durham

The TSX-listed legal and e-discovery software provider has hired Perella Weinberg Partners as financial advisor amid declining revenue and rising leverage. An ad hoc group of majority term lenders and secured noteholders is working with Paul Hastings and Houlihan Lokey and has turned away additional creditors after its holdings crossed a majority, prompting minority creditors to organize with Hogan Lovells and Cadwalader.

The 8.625% secured notes due 2029 led software credit decliners on the week, dropping 8.1 points to about 61.7, while the $350 million term loan due 2031 fell 6.3 points to 65.5. Pressure has compounded over recent months through weak quarterly results, the withdrawal of long-term financial targets and downgrades from both S&P Global Ratings and Moody’s Ratings, alongside management turnover and last year’s request to waive a default tied to late fiscal 2025 financials. Octus’ coverage of Dye & Durham is HERE.

Dynata

Lenders to the survey and market research firm, which does business as New Insight Holdings, are organizing with Milbank as legal advisor to evaluate a discounted debt swap that the firm proposed this week.
Milbank is likely to prepare a cooperation agreement for Dynata’s first-out and second-out lenders who want to evaluate the situation and negotiate the best deal for the company and its lenders. Dynata, advised by Gibson Dunn and Houlihan Lokey, launched an offer on July 27 to all first-out and second-out lenders to uptier roughly $680 million of second-out loans due Oct. 15, 2028, into SOFR+500 bps junior first-out loans due Oct. 15, 2031, at 75 cents on the dollar, with an additional 5 cents for lenders tendering within 10 business days and an Aug. 17 expiry.

The new junior first-out paper would sit behind about $80 million of existing senior first-out loans but ahead of the second-out, and the accompanying consent solicitation would strip substantially all affirmative and negative covenants, reporting and information rights, and curtail lender expense reimbursement and remedy rights. The company has told lenders it needs more time to package decades of consumer data for artificial intelligence use and wants to redirect the principal savings into that initiative. The second-out loan was indicated at 40/50, two years after a chapter 11 filing that cut about 40% of debt and handed control to prepetition first lien lenders including BlackRock, Bain, First Eagle and Mudrick. Octus’ coverage of Dynata is HERE.

Cubic Corp.

The privately held company is weighing both in-court and out-of-court solutions for its capital structure. Lenders are represented by Davis Polk as legal advisor and are also working with Centerview Partners as investment banker. Octus’ coverage of Cubic Corp. is HERE.

Republic National Distributing Co.

Republic National Distributing, the second-largest U.S. distributor of alcoholic beverages, filed chapter 11 in the Southern District of Texas on July 26, aiming to complete private asset sales and wind down operations.

At a first day hearing on July 27, Judge Christopher Lopez granted interim approval of $250 million DIP financing from prepetition lenders, made up of $75 million of new money and a $175 million rollup of prepetition debt. Interim approval provides the debtors with $50 million in new money and the rollup of approximately $66.3 million in priority delayed-draw term loans, with approximately $108.7 million in revolving loans rolling up on final approval.

Under their DIP milestones, the debtors must emerge by Oct. 9. They are seeking an Oct. 4 confirmation hearing for a liquidating plan that must be filed by today, July 31. Octus’ Republic National Distribution coverage is HERE.

Alkegen

On July 26, Alkegen – a specialty insulation and filtration materials manufacturer headquartered in Irving, Texas – filed chapter 11 in the Northern District of Texas to implement the terms of their restructuring support agreement with an ad hoc group of first lien lenders, first lien noteholders and second lien noteholders.

The proposed restructuring would deleverage the company’s balance sheet by approximately $3.1 billion and equitize a substantial portion of its funded debt. The RSA is supported by holders of approximately 99% of first lien claims arising from the company’s 2024 liability management exercise, 80% of second lien noteholders, 95% of preferred equity and 99% of senior common equity.

At July 28’s first day hearing, Judge Scott W. Everett approved the debtors’ $630 million DIP facility on an interim basis, unlocking $265 million of new-money DIP loans for the debtors and rolling up $265 million of prepetition first lien debt. Octus’ Alkegen coverage is HERE.

First Brands Group

Judge Christopher Lopez held a three-day trial on confirmation of First Brands’ proposed liquidation plan, scheduling closing arguments for Friday, Aug. 7. The debtors’ interim CEO, Charles Moore, asserted the plan was proposed in good faith and is in the best interests of creditors including general unsecured creditors that have largely rejected the plan. First Brands’ expert witness, Marc Kirschner of Kirschner Consulting Co. defended his forecast that a litigation trust could recover $2 billion on estate claims by the end of 2028 – the hurdle for full payment of about $300 million in administrative and priority claims.

However, plan objectors including special purpose vehicle lenders, factoring parties and the U.S. Trustee argued Moore and Kirschner failed to independently assess the $25.4 billion in transfers they said the estates could potentially recover. They insisted the witnesses failed to account for defenses or the likelihood of actually recovering in the litigation. Octus’ First Brands coverage is HERE.

FAT Brands Inc.

Judge Alfredo R. Perez confirmed the FAT Brands debtors’ liquidating plan at a hearing on July 27, overruling two remaining objections from the U.S. Trustee focusing on certain opt-out release procedures and a chapter 7 trustee seeking a $500,000 reserve or carve-out for a potential claim.

The plan, premised on a mediated global settlement with the ad hoc securitization noteholders group, residual securitization noteholder 3|5|2 Capital and official committee of unsecured creditors, would establish a $1.5 million liquidating trust to monetize and distribute remaining assets, after the debtors closed their going-concern asset sales to the ad hoc group via credit bid on June 15. Remaining assets include retained causes of action against former CEO Andrew Wiederhorn and other officers and directors. The plan went effective earlier today. Octus’ FAT Brands coverage is HERE.

MF Global

On July 28, the post-confirmation debtors in the long-running MF Global cases moved for approval of a restructuring support agreement backed by Knighthead Capital Management, Caspian Capital, Empyrean Investments or their affiliated funds. The RSA contemplates a new chapter 11 plan that would pay MF Global’s existing bankruptcy claimants and see a new reorganized entity emerge with equity interests held by Homer City Holdings, an entity in which Knighthead holds “significant” equity positions.

MF Global Holdings confirmed a chapter 11 plan in April 2013. To date, the plan administrator “has distributed over $1.4 billion to third-party creditors,” according to the debtors, who say their remaining assets include “unliquidated claims” relating to the debtors’ former U.K. affiliates and over about $1.13 billion of federal NOLs. Under the proposed restructuring, the liquidating debtors would execute a series of corporate reorganizations and transactions prior to filing a chapter 11 case for newly created entities, whose creditors would be able to share in the upside of the NOLs. Octus’ MF Global coverage is HERE.

J&J Announces $5.5B Proposed Ovarian Talc Settlement

Johnson & Johnson announced a proposed $5.5 billion settlement to resolve claims over alleged ovarian cancer from the company’s talc products contingent on the participation of 95% of remaining claims. Johnson & Johnson, which previously tried to resolve cosmetic talc claims through three unsuccessful chapter 11 filings, announced the settlement days after the federal court presiding over the cosmetic talc multidistrict litigation raised doubts over the strength of plaintiffs’ expert testimony. Octus’ coverage of Johnson & Johnson is available HERE

FCC Excludes DISH Wireless Intercompany Claim From $2.4B Vendor Trust

The Federal Communications Commission clarified that an $8.8 billion disputed intercompany claim against the DISH Wireless debtors held by the DWLLC trust for the benefit of DISH DBS noteholders is not eligible for distributions from the FCC-mandated $2.4 billion DISH Wireless 5G buildout claims fund. Octus’ coverage of EchoStar is HERE.

Section 301 Tariffs Draw Fresh Legal Challenges

Two sets of importers filed suits challenging the Trump administration’s newly imposed section 301 forced labor tariffs, which range from 10% to 12.5% on 60 trading partners. The plaintiffs allege the U.S. Trade Representative’s forced labor investigation relies on generic conclusions and are a pretext for implementing tariffs substantially similar to those voided by the Supreme Court earlier this year. Octus’ coverage of tariff policy is HERE.