UBS warns of “cautionary tale” of loose terms
UBS analysts have warned of additional pressure on documentation as lenders compete for deals, in the wake of a high-profile private debt loss earlier this month.
Vista Equity Partners wrote off its equity position in Pluralsight, an education tech company, to zero following a $3.5bn (£2.8bn) take-private acquisition in 2021.
This was reportedly due to company underperformance making Pluralsight unable to service its debt.
Read more: Lenders introducing more flexibility to loan docs to beat competition
UBS noted that the original acquisition was funded with $1.3-1.5bn in debt financing that was syndicated to a number of direct lenders, with the debt placed in business development companies (BDCs).
According to Pitchbook, lenders include Blue Owl Capital, Ares Management, Golub Capital, Goldman Sachs Asset Management, Oaktree Capital Management, BlackRock and Benefit Street Partners.
“For lenders, the situation continues to develop, as it appears that loose covenants have allowed Pluralsight to move IP collateral into a new subsidiary, and use those assets to get fresh financing from Vista, in what is known as a drop-down transaction where collateral is reappropriated away from existing lenders,” UBS said.
“The situation is less than ideal as Vista has engaged in an aggressive stop-gap refinancing at the expense of creditors, and has alarmed private credit investors. To date, this type of transaction has occurred numerous times in the syndicated loan market but has been a far less common occurrence in the private credit market.”
Read more: Fitch: Competition in private debt is intensifying
UBS said that this appeared to be “largely an idiosyncratic event” with limited impact on the wider private credit industry, although the full effects will become clearer in the coming months as positions are remarked and investors react to potential principal impairments.
However, it highlighted increasing competition between the syndicated loan market and the upper end of the direct lending market.
“As competition between these two markets persists, this could put additional pressure on documentation for certain private credit deals as lenders aim to compete for transactions,” UBS warned. “Regardless, it serves as a cautionary tale for how lenders can be impacted by transactions with loose covenants or documentation.”
