Essential Dynamics: How Borrower Size and Sponsor Behaviour Shape Private Credit Recoveries

In the intriguing game of private credit recoveries, the size of the borrower and the behaviour of the sponsor play influential roles. Larger borrowers, particularly those situated in the upper middle market, according to Brad Colman, Global Head of Sponsor Coverage for Private Credit Strategies at Blackstone Credit and Insurance, have demonstrated significant resilience, even in periods of elevated defaults. The resilience among these large borrowers is not associated solely with loan documentation but additionally with the large financial stakes held by the sponsors.

Echoing on the theme of sponsor behaviour, Colman stressed the transparency maintained through these recovery procedures, particularly when sponsors have to oversee handing over businesses to lenders, further cementing the integral role that sponsor actions play in navigating credit recoveries. A sponsor’s reputation in the credit market is critical and even more so for lenders in the upper middle market, who can wield influence over sponsor outcomes across multiple borrowers by being the sole or majority lender.

However, on the recent discussions over the systemic risks posed by private credit in the financial system, Colman affirms that his firm, Blackstone, views it rather as a strengthening feature of the financial system. According to him, this notion is supported by the resilience of their portfolio’s credit quality and its stable non-accruals well below industry peers. Furthermore, their portfolio companies continue to witness growth, bolstering their belief. The private credit sector, with its senior secured loans and long-term structures matched to assets, has proved to be a stabilising industry force, even when the public markets pull back.

To conclude, beyond the realms of borrower scale and sponsor behaviour, Blackstone has also evolved its approach amidst a slower M&A environment. Their strategy is focused on providing comprehensive solutions that strategically aid sponsors and borrowers in terms of cash flow and reducing the senior-debt interest burden.