Inside the Blood Sport of Creditor-on-Creditor Violence

Joe Weisenthal (0:03)

Bloomberg Audio Studios.

Tracy Alloway (0:05)

Podcasts, radio, news. Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:25)

And I'm Joe Weisenthal.

Tracy Alloway (0:27)

Joe, what do you know about creditor on creditor violence?

Joe Weisenthal (0:30)

I don't know anything.

Tracy Alloway (0:31)

Other than it's a very punchy term.

Joe Weisenthal (0:33)

It's a great, that's literally it. It's come up a few times in, all right, it's come up a few times in episodes we've done about credit. And I get the impression that, you know, lenders to a firm have different status, and some are higher up in the rank than others, and that they would like to probably use the technicalities of the legal code to improve their rank in some sense when money gets paid out to lenders.

Tracy Alloway (1:00)

Yes, so it has come up in a number of-

Joe Weisenthal (1:02)

It's not really violence, is it?

Tracy Alloway (1:03)

Well, some of the fights get pretty nasty. Okay, okay. Okay, well, so when I think about it, I think back to when I covered the leveraged loan market at the FT, and this was sort of like 2013, 2014

And I remember writing stories about how leveraged loans, more of them were becoming kovlite, so weaker covenants for lenders or investors. What that means is companies basically had more leeway to restructure their assets if they were trying to raise new capital or stave off bankruptcy or whatever at the expense of those lenders slash investors. And back in 2014, I think the proportion of the leveraged loan market that was kovlite was something like 30 percent. And that was like a big deal. That was already higher than the leveraged buyout boom in 2007 Now the vast majority of leveraged loans, I think something like 90 percent could be called kovlite. So the entire market is basically kovlite at this point, which fits into the creditor on creditor violence theme. So I feel like we need to dive into this.

Joe Weisenthal (2:18)

What it is, my impression is that if I'm going to be a firm that buys leveraged loans, I need a good lawyer to look over the contract.

Tracy Alloway (2:27)

Well, I kind of wonder, I guess I wonder relatively how important like legal expertise is versus valuation expertise.

Joe Weisenthal (2:35)

This is what I am wondering as well.

Tracy Alloway (2:36)

All right. So let's get into it. I am very pleased to say we have the perfect guest. We're going to be speaking with Sujeet Indap. He is of course the Wall Street Editor over at the FT. My former colleague, we used to double byline on at least one piece, I think. He is also the author of the excellent Caesar's Palace Coup book, which if you haven't read, I would highly recommend, especially on that point about distressed debt fights getting kind of nasty. Sujeet, thank you so much for coming on Odd Lots.

Sujeet Indap (3:08)

Tracy, hello Joe, it's great to be here. Thank you.

Tracy Alloway (3:10)

So I guess my first question is, we see these headlines about creditor on creditor violence, or someone will be writing about the private credit market, and they'll be an aside about creditor on creditor violence and how it's becoming more of a thing. Can you give us some context around whether or not this is becoming a bigger trend? I feel like it is, but it's not like there's a violence index that we can look at.

Sujeet Indap (3:36)

Yeah, so the idea of violence in corporate restructuring and private equity deals is not a new idea. Imagine the business that's been bought by the private equity firm is just less valuable over time. The pie has shrunk. There's going to be a fight over who gets what piece and how big those pieces are. The creditor on creditor violence phenomena, though, is a little bit more nuanced and novel, and that's the idea that imagine you, Joe, you, Tracy, and me, we are all holders of the first lien term loan. Let's say you own 500 million, Joe, you've got 300 million. Let's say I'm poor, say we're the FT and only have 15 million. But there would be the view that since we're all in the same security governed by the same document, that our rights are the same and we are all going to be treated equally in this fight with the private equity firm and maybe the junk bond holders below us. The creditor on creditor violence nuance now is that in fact, we are not equal and you two as large holders can do things to me, small holder that are not equal treatment, arguably unfair, arguably impermissible.