Private Debt News Weekly Issue #34: PIK Debt Risks, Restructurings, and $1B Lending Moves
Regulators Eye Systemic Risks as Private Credit Reshapes Through Bold Deals and European Growth
Welcome back to Private Debt News Weekly, where private credit continues to evolve at breakneck speed. This week’s edition is packed with bold forecasts, high-profile restructurings, and an alarming rise in Payment-in-Kind (PIK) debt that has regulators on edge. Meanwhile, banks and private credit managers deepen partnerships, and firms like King Street and Medalist Partners launch new funds to tap into lucrative niches.
With private credit expanding into new frontiers while grappling with systemic risks, here’s your front-row seat to the latest developments in this $1.6 trillion industry.
Key Market Trends
PIK Debt Under the Spotlight: Risk or Reward?
Payment-in-Kind (PIK) debt has hit the radar of regulators like the IMF amid fears that it’s masking financial stress in private credit portfolios.
The Numbers: PIK debt accounted for over 20% of net investment income at some private credit funds in Q3, up six percentage points year-over-year.
Regulatory Focus: The IMF plans a deep dive into PIK’s impact, questioning whether it delays inevitable insolvencies and amplifies systemic risks.
Market Sentiment: JPMorgan analysts warn that “higher for longer” rates could keep PIK in focus, with concerns over its use in “extend-and-pretend” scenarios to avoid defaults.
Recent Deals
Private Lenders Take Control of Alacrity Solutions
Antares Capital, Blue Owl, and KKR are set to take over insurance claims manager Alacrity Solutions in a $1.75 billion restructuring.
The Breakdown: Lenders will convert $500M of loans into equity and inject $175M in fresh debt, leaving BlackRock’s $560M equity investment wiped out.
Why It Matters: This is the latest in a string of private credit restructurings as companies grapple with higher interest rates and dwindling cash flows.
BMO Partners with Canal Road Group for $1B Lending Push
Bank of Montreal continues its pivot into private credit with a $1 billion commitment to Canal Road Group’s direct lending strategy.
Strategic Significance: This partnership reflects a growing trend of banks teaming up with private credit platforms to leverage relationship networks while sidestepping balance sheet exposure.
Context: BMO has already deployed more than $12 billion in a similar partnership with Oak Hill Advisors, illustrating how banks are shifting from asset holders to originators.
Fundraising Activity
King Street Launches European-Focused Credit Fund
King Street Capital, backed by $70M from Generali Investments, aims to raise a new private credit fund targeting returns of over 10%.
Investment Focus: Up to 50% allocated to Europe, with 80% in corporate and asset-based lending and the rest in distressed opportunities.
Why It’s Noteworthy: The fund highlights the enduring appeal of European private credit, where opportunities are expanding as banks pull back.
Medalist Partners Targets $750M for Asset-Based Lending
Medalist Partners is seeking $750M for its fourth private credit fund, a 25% increase from its predecessor.
Focus Areas: Specialty finance, commercial real estate, and high-margin niches like lawsuit and equipment financing.
The Pitch: With fewer rivals in niche sectors, Medalist aims to sidestep crowded middle-market lending and secure attractive terms.
Forward Outlook
Defaults on the Rise: Private credit defaults are projected to hit 3% in 2025, with consumer sector borrowers leading the charge at 6.5%.
Regulatory Oversight Intensifies: Expect more scrutiny on PIK debt, leverage layers, and “extend-and-pretend” strategies as watchdogs focus on systemic risks.
Banks Go All In on Partnerships: From Citigroup’s $25B Apollo deal to BMO’s Canal Road partnership, banks are solidifying their roles as originators rather than lenders.
European Growth Opportunities: As US competition heats up, Europe’s less saturated private credit market is attracting significant new capital.
Private credit is transforming, from innovative fund launches to growing regulatory concerns. Stay tuned to Private Debt News Weekly for all the insights shaping this high-growth, high-stakes market.