Private Credit Valuations: When Marks Diverge from Reality?

Bloomberg article: https://shorturl.at/kBd52 The abrupt collapse of Renovo raises a familiar but important question for private credit investors: 𝐇𝐨𝐰 𝐰𝐞𝐥𝐥 𝐝𝐨 𝐦𝐚𝐫𝐤𝐬 𝐫𝐞𝐟𝐥𝐞𝐜𝐭 𝐫𝐞𝐚𝐥𝐢𝐭𝐲 𝐰𝐡𝐞𝐧 𝐥𝐢𝐪𝐮𝐢𝐝𝐢𝐭𝐲 𝐢𝐬 𝐥𝐢𝐦𝐢𝐭𝐞𝐝 𝐚𝐧𝐝 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐢𝐬 𝐮𝐧𝐞𝐯𝐞𝐧?

Renovo’s debt was still 𝐦𝐚𝐫𝐤𝐞𝐝 𝐚𝐭 𝐩𝐚𝐫 at the end of September - even though fundamentals had been weakening for some time. Weeks later, it was 𝐰𝐫𝐢𝐭𝐭𝐞𝐧 𝐝𝐨𝐰𝐧 𝐭𝐨 𝐳𝐞𝐫𝐨 as the business entered liquidation.

Regulatory filings showed lenders had already agreed to a debt-for-equity swap and deferred cash interest earlier in the year, yet the marks had remained unchanged. After Tricolor, First Brands, and now Renovo, it does appear that there is more than one cockroach.

𝐈𝐧 𝐚 𝐦𝐚𝐫𝐤𝐞𝐭 𝐛𝐮𝐢𝐥𝐭 𝐨𝐧 𝐛𝐞𝐬𝐩𝐨𝐤𝐞 𝐭𝐞𝐫𝐦𝐬 𝐚𝐧𝐝 𝐥𝐢𝐦𝐢𝐭𝐞𝐝 𝐭𝐫𝐚𝐧𝐬𝐩𝐚𝐫𝐞𝐧𝐜𝐲, 𝐦𝐚𝐧𝐚𝐠𝐞𝐫 𝐬𝐞𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐛𝐞𝐜𝐨𝐦𝐞𝐬 𝐜𝐫𝐢𝐭𝐢𝐜𝐚𝐥. Underwriting discipline, including the discipline to walk away from transactions, transparency in investor updates, and the willingness to challenge collateral valuations can vary widely across firms.

In private credit, the ability to 𝐜𝐨𝐧𝐭𝐫𝐨𝐥 𝐬𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐞, 𝐩𝐫𝐨𝐭𝐞𝐜𝐭 𝐜𝐨𝐥𝐥𝐚𝐭𝐞𝐫𝐚𝐥 𝐯𝐚𝐥𝐮𝐞𝐬, and 𝐦𝐚𝐢𝐧𝐭𝐚𝐢𝐧 𝐚 𝐜𝐥𝐞𝐚𝐫, 𝐞𝐧𝐟𝐨𝐫𝐜𝐞𝐚𝐛𝐥𝐞 𝐞𝐱𝐢𝐭 𝐩𝐚𝐭𝐡 often matters more than the headline yield. When things unravel, these are the only protections that remain, preventing a cockroach infestation.

𝘛𝘩𝘦 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘱𝘳𝘰𝘷𝘪𝘥𝘦𝘥 𝘪𝘯 𝘵𝘩𝘪𝘴 𝘱𝘰𝘴𝘵 𝘪𝘴 𝘧𝘰𝘳 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘱𝘶𝘳𝘱𝘰𝘴𝘦𝘴 𝘰𝘯𝘭𝘺 𝘢𝘯𝘥 𝘴𝘩𝘰𝘶𝘭𝘥 𝘯𝘰𝘵 𝘣𝘦 𝘤𝘰𝘯𝘴𝘵𝘳𝘶𝘦𝘥 𝘢𝘴 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭, 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵, 𝘰𝘳 𝘱𝘳𝘰𝘧𝘦𝘴𝘴𝘪𝘰𝘯𝘢𝘭 𝘢𝘥𝘷𝘪𝘤𝘦. 𝘈𝘭𝘸𝘢𝘺𝘴 𝘤𝘰𝘯𝘥𝘶𝘤𝘵 𝘺𝘰𝘶𝘳 𝘰𝘸𝘯 𝘳𝘦𝘴𝘦𝘢𝘳𝘤𝘩 𝘢𝘯𝘥 𝘤𝘰𝘯𝘴𝘶𝘭𝘵 𝘸𝘪𝘵𝘩 𝘢 𝘲𝘶𝘢𝘭𝘪𝘧𝘪𝘦𝘥 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘢𝘥𝘷𝘪𝘴𝘰𝘳 𝘣𝘦𝘧𝘰𝘳𝘦 𝘮𝘢𝘬𝘪𝘯𝘨 𝘢𝘯𝘺 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵 𝘥𝘦𝘤𝘪𝘴𝘪𝘰𝘯𝘴. 𝘗𝘢𝘴𝘵 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦 𝘪𝘴 𝘯𝘰𝘵 𝘪𝘯𝘥𝘪𝘤𝘢𝘵𝘪𝘷𝘦 𝘰𝘧 𝘧𝘶𝘵𝘶𝘳𝘦 𝘳𝘦𝘴𝘶𝘭𝘵𝘴.

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