COVID-19 credit strategies must be flexible – AVCJ Forum

Speakers representing a range of credit strategies concurred that while lending has produced strong returns during the pandemic, default rates have not been as high as expected due to government stimulus packages.

This has created a surprisingly subdued environment for distress, even in hard-hit areas such as hospitality. The environment has proven too unpredictable to underwrite forward financial figures in these businesses, making virus-based distress plays more like bets than investments.  

Ted Goldthorpe, head of credit at BC Partners, advised patience in this context while predicting a boom in the years to come. The initial distress opportunity will focus on areas most directly impacted by COVID-19, but by 2021, it may move into more regulated industries such as healthcare.

“I think the market is really confusing solvency with liquidity,” Goldthorpe said. “Most companies, even if they’re doing well, are burning through cash, and we expect the default rate to go up in the middle to end of next year. We think there’s going to be a big opportunity to deploy capital, and a lot of that is going to be in the private markets.”

In the meantime, BC has exploited the opportunity at hand. In March, the firm deployed 40% of its capital into liquid assets, all of which have already been sold. BC typically allocates about 75% of its credit portfolio to its lending business and 25% to distress and special situations.

Mandate flexibility has also been a priority this year for Bain Capital Credit, according to Barnaby Lyons, head of Asia at the firm. Bain has historically focused on special situations but traded and turned 100% of its structured credit portfolio this year.

“In our liquid direct lending and special situations strategies, the vast majority of our capital is locked up, closed-end funds that allow us to really just focus on getting the underlying underwriting right and hold through volatility but also to use the dry powder in those vehicles to take advantage of areas like we’ve seen this year, where we were playing public, private, distress, performing, growth investments in certain sectors, and non-performing loan investments in other sectors, dynamically,” Lyons said.

“If you try to put a square peg in a round hole at a time when that doesn’t exist, that’s how you make mistakes.”

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• Topics
• GPs
• Credit/Special Situations
• Credit
• BC Partners
• Bain Capital Asia
• Distress
• covid-19
• coronavirus
• AVCJ Events