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Debt Market Review - October 2023

The U.S. economy remains resilient despite the Federal Reserve’s interest rate hike campaign. Results from the most recent lending surveys of the U.S. and Eurozone banks show tightening underwriting conditions and weaker loan demand.


Unit­ed States

Soft Land­ing Appears to be Sticking

  • Gross domes­tic prod­uct (“GDP”) grew at a sea­son­al­ly- and infla­tion-adjust­ed 2.4% annu­al rate in Q2 2023, the Com­merce Depart­ment said. The econ­o­my has expand­ed at bet­ter than a 2.0% pace over the past year, fol­low­ing a mild con­trac­tion in ear­ly 2022. Eco­nom­ic growth is rough­ly in line with the rate record­ed in the decade before the pan­dem­ic took hold.
  • The slow­down in con­sumer spend­ing from a 4.2% growth in the first quar­ter to a 1.6% growth in Q2 2023 reflects house­hold out­lays of big-tick­et pur­chas­es cool­ing as Amer­i­cans flocked back to deal­er­ships at the start of the year.

Tight­en­ing Under­writ­ing Con­di­tions Pro­vide Evi­dence that the Cen­tral Bank’s Inter­est-Rate Hike Cam­paign is Slow­ing the Nation’s Finan­cial Gears as Intended

  • The Fed has raised inter­est rates by 5.3% since March 2022, and its sur­veys and hard data have shown banks have been slow­ing their lend­ing in response. You’ve got lend­ing con­di­tions tight and get­ting a lit­tle tighter, you’ve got weak demand, and … it gives a pic­ture of a pret­ty tight cred­it con­di­tions in the econ­o­my,” Fed Chair Jerome Pow­ell said last week when asked about July’s Senior Loan Offi­cer Opin­ion Sur­vey on Bank Lend­ing Prac­tices (“SLOOS”) results.

U.S. Chap­ter 11 Bank­rupt­cy Fil­ings Jumped 53.6% in Q2 2023 from a Year Earlier

  • August marks 13 con­sec­u­tive months that total, indi­vid­ual, and com­mer­cial bank­rupt­cy fil­ings have reg­is­tered month­ly year-over-year increas­es. The con­tin­ued year-over-year increas­es indi­cate the antic­i­pat­ed growth of bank­rupt­cy fil­ings is becom­ing a real­i­ty,” said Gregg Morin, Vice Pres­i­dent of Busi­ness Devel­op­ment and Rev­enue at Epiq, a provider of U.S. bank­rupt­cy fil­ing data. This empha­sizes the crit­i­cal role bank­rupt­cy ana­lyt­ics plays in cre­at­ing effec­tive strate­gies and informed deci­sions when nav­i­gat­ing an evolv­ing market.”
  • Bank­rupt­cy fil­ings for small busi­ness, cat­e­go­rized as Sub­chap­ter V elec­tions with­in Chap­ter 11, jumped 55.0% in Q2 2023 ver­sus a year ear­li­er, accord­ing to data from Epiq.


Busi­ness­es are Under Pres­sure — Signs of Con­trac­tion Ahead

  • After briefly shrink­ing at the end of last year, the GDP of the 20 coun­tries that use the euro returned to growth in Q2 2023 at an annu­al­ized rate of 1.1%. That mod­est pick­up mir­rored an accel­er­a­tion in U.S. eco­nom­ic growth dur­ing the same peri­od and con­trast­ed with a slow­down in Chi­na. The euro­zone part­ly ben­e­fit­ed from an out­lier 13.7% increase in Ire­land, whose GDP has gyrat­ed wild­ly fol­low­ing the for­tunes of large U.S. drug com­pa­nies domi­ciled on the island. The near-term eco­nom­ic out­look for the Euro Area (“EA”) has dete­ri­o­rat­ed, owing large­ly to weak­er domes­tic demand,” Euro­pean Cen­tral Bank Pres­i­dent Chris­tine Lagarde said Thurs­day. High infla­tion and tighter financ­ing con­di­tions are damp­en­ing spend­ing.” China’s slug­gish eco­nom­ic activ­i­ty has also damp­ened the Euro­zone with exports to Chi­na in the first five months of this year only 1.2% high­er than the same time peri­od of last year. Germany’s close­ly tracked Ifo busi­ness con­fi­dence index fell in July for the third con­sec­u­tive month. Sur­veys of pur­chas­ing man­agers for July con­duct­ed by S&P Glob­al point to a con­tin­ued decline in man­u­fac­tur­ing activ­i­ty, while the much larg­er ser­vices sec­tor has slowed.

Euro­zone Banks Cut Lend­ing Even Before Lat­est Finan­cial Turmoil

  • Cred­it is tight­en­ing con­sid­er­ably at Euro­pean banks which is par­tic­u­lar­ly notable because unlike in the U.S., Euro­pean banks remain dom­i­nant as lenders; non-bank lenders are still emerg­ing as an alter­na­tive to banks, and many remain fair­ly niche.7 The July Bank Lend­ing Sur­vey (“BLS”) released by the Euro­pean Cen­tral Bank (“ECB”) found busi­ness demand for new loans is at a record low, an indi­ca­tion that invest­ment spend­ing is set to weaken.

Recent Case Studies

Baby Food Man­u­fac­tur­er and Food Prod­ucts Toll Pack Provider Secured a Uni­tranche Facil­i­ty and an ABL RLOC from Two Sep­a­rate Cap­i­tal Providers

  • Chi­ron Finan­cial (“Chi­ron”) act­ed as the exclu­sive invest­ment banker to a pri­vate equi­ty-owned baby food man­u­fac­tur­er and food prod­ucts toll pack provider (“Baby Food Com­pa­ny”) to assist in an out-of-bank­rupt­cy dis­tressed bal­ance sheet recapitalization.
  • The Baby Food Com­pa­ny was seek­ing a cred­it facil­i­ty of < $20 MM to refi­nance the lega­cy debt, fund the CAPEX plan, and pro­vide addi­tion­al liq­uid­i­ty for work­ing cap­i­tal. Chi­ron helped the Baby Food Com­pa­ny secure (i) a uni­tranche facil­i­ty with inter­est rates of SOFR + 3.0% and pay­ment-in-kind (“PIK”) of 5.0% plus (ii) an ABL RLOC facil­i­ty with advance rates of 85.0% on eli­gi­ble accounts receiv­able (WSJ Prime + 7.3%), 75.0% of forced liq­ui­da­tion val­ue (“FLV”) of eli­gi­ble inven­to­ry (WSJ Prime + 10.0%), and a struc­tured over-advance of 10.0% of the facil­i­ty (WSJ Prime + 10.0%).
  • Chi­ron con­tact­ed over 400 cap­i­tal providers span­ning from ABL lenders, sub­or­di­nat­ed debt lenders, M&E lenders, and struc­tured cap­i­tal providers. The term sheets Chi­ron gar­nered dur­ing the process pro­vides a sol­id base­line for the cur­rent lend­ing mar­ket for a $20 – 40 MM TEV baby food man­u­fac­tur­er and food prod­ucts toll pack provider. 

Pre­mi­um Choco­late Con­fec­tions Pro­duc­er Under LOI will be Acquired with an ABL RLOC

  • Chi­ron act­ed as the exclu­sive invest­ment banker to a pri­vate equi­ty-owned pre­mi­um choco­late con­fec­tions pro­duc­er (“Choco­late Com­pa­ny”) in a sell-side engagement.
  • The Choco­late Com­pa­ny will be acquired with a > $20 MM ABL RLOC with advance rates on eli­gi­ble accounts receiv­able of 85.0% (WSJ Prime + 5.0%), inven­to­ry of 85.0% mul­ti­plied by the less­er of (i) 60.0% of cost or (ii) NOLV (WSJ Prime + 5.0%), M&E of 75.0% of the NOLV (WSJ Prime + 5.5%), and an over-advance of 20.0% of the facil­i­ty (WSJ Prime + 13.0%).

Hous­ton-Based Spe­cial­ty Refin­er of High-Vol­ume Inter­me­di­ary Chem­i­cals as well as Renew­able Jet Fuel Secured Post-Peti­tion DIP Financing

  • Chi­ron act­ed as the exclu­sive invest­ment banker to a Hous­ton-based spe­cial­ty refin­er of high-vol­ume inter­me­di­ary chem­i­cals as well as renew­able jet fuel (“Chem­i­cal Com­pa­ny”) to assist in a com­pre­hen­sive bal­ance sheet restructuring.
  • Chi­ron had min­i­mal time to help secure financ­ing for the Chem­i­cal Com­pa­ny as cash was run­ning tight. The mar­ket­ing process last­ed sev­en days, and in the process, Chi­ron con­tact­ed 17 poten­tial lenders. The term sheet cho­sen by the Com­pa­ny had a facil­i­ty size of < $20 MM with an advance rate of up to 50.0% of the fair mar­ket val­ue (“FMV”) of the real estate, an inter­est rate of WSJ Prime + 6.5%, an orig­i­na­tion fee of 3.0%, and a pre­pay­ment fee of 5.0%. In an analy­sis con­duct­ed by Chi­ron com­par­ing the Chem­i­cal Company’s DIP facil­i­ty to oth­er recent­ly autho­rized post-peti­tion DIP facil­i­ties, the secured DIP facil­i­ty was found to be con­sis­tent across cur­rent mar­ket terms. Con­sid­er­ing the time­frame to con­duct the mar­ket­ing process, the referred to DIP facil­i­ty pro­vid­ed the best avail­able com­pre­hen­sive post-peti­tion financ­ing for the Chem­i­cal Company.

U.S. Head­quar­ters Oil­field Ser­vice Com­pa­ny with Oper­a­tions in Africa Secured A/R Financing 

  • Chi­ron act­ed as the exclu­sive invest­ment banker to a U.S. head­quar­tered oil­field ser­vice com­pa­ny with oper­a­tions in Africa (“OFS Com­pa­ny”) to assist in a debt cap­i­tal raise.
  • The OFS Com­pa­ny was seek­ing financ­ing to pro­vide liq­uid­i­ty for work­ing cap­i­tal, sup­port future growth from com­mit­ted con­tracts with blue-chip clien­tele, and pay down accounts payable. The < $20 MM fac­tor­ing facil­i­ty had an advance rate of 85.0% on eli­gi­ble accounts receiv­able with an inter­est rate of WSJ Prime + 0.5%, a 0.7% dis­count on the gross invoice amount, and a 1.0% orig­i­na­tion fee.
Pic 1

U.S. Cred­it Man­agers are Tight­en­ing Under­writ­ing Stan­dards Among Every Major Cat­e­go­ry of Lend­ing Activities

  • Accord­ing to the July’s SLOOS, tight­en­ing under­writ­ing stan­dards was most wide­ly report­ed for spreads of loan rates over the cost of funds, pre­mi­ums charged on riski­er loans, and costs of cred­it lines. In addi­tion, sig­nif­i­cant net shares of banks gen­er­al­ly report­ed hav­ing tight­ened the max­i­mum size and matu­ri­ty of cred­it lines, loan covenants, col­lat­er­al­iza­tion require­ments, and the use of inter­est rate floors to firms of all sizes. Banks most fre­quent­ly cit­ed a less favor­able or more uncer­tain eco­nom­ic out­look and expect­ed dete­ri­o­ra­tion in col­lat­er­al val­ues and the cred­it qual­i­ty of loans as rea­sons for expect­ing to tight­en lend­ing stan­dards fur­ther over the remain­der of 2023. Major net shares of banks also report­ed a reduced tol­er­ance for risk, dete­ri­o­ra­tion in their liq­uid­i­ty posi­tions, wors­en­ing indus­try-spe­cif­ic prob­lems, increased con­cerns about the effects of leg­isla­tive changes, super­vi­so­ry actions, or changes in account­ing stan­dards, and decreased liq­uid­i­ty in the sec­ondary mar­ket for loans as impor­tant rea­sons for tight­en­ing stan­dards or terms for C&I loans.
Pic 2

U.S. Cred­it Man­agers Report­ed Con­tin­ued Weak Demand for Loans Among Every Major Lend­ing Category

  • Though not to the degree report­ed in the pre­vi­ous sur­vey cov­er­ing Q1 2023 when banks said busi­ness demand for cred­it was the soft­est since 2009, the lat­est sur­vey still shows over­all weak demand for loans. The net share of banks report­ing demand from large and medi­um firms was (-51.6%), com­pared with (-55.6%) in the pri­or peri­od and from small firms was (-47.5%), up from (-53.3%). Fur­ther­more, sig­nif­i­cant net shares of both domes­tic and for­eign banks report­ed that the num­ber of inquiries from poten­tial bor­row­ers regard­ing the avail­abil­i­ty and terms of cred­it lines decreased.
Pic 3

EEA Banks Report­ed Fur­ther Tight­ened Cred­it Stan­dards in the July 2023 Bank Lend­ing Sur­vey (“BLS”)

  • The cumu­lat­ed net tight­en­ing since the begin­ning of 2022 has been sub­stan­tial, and the BLS results have pro­vid­ed ear­ly indi­ca­tions about the sig­nif­i­cant weak­en­ing in lend­ing dynam­ics observed since last autumn. Against the back­ground of the typ­i­cal lags in the impact of mon­e­tary pol­i­cy trans­mis­sion on the econ­o­my, risks relat­ed to the eco­nom­ic out­look and firm-spe­cif­ic sit­u­a­tions remained the main dri­ver of the tight­en­ing of cred­it stan­dards for firms. Banks’ low­er risk tol­er­ance, their cost of funds, and bal­ance sheet sit­u­a­tion also con­tributed to the tight­en­ing, reflect­ing high­er cred­it risks in the con­text of ris­ing inter­est rates and weak eco­nom­ic growth. In Q3 2023, EEA banks expect a fur­ther net tight­en­ing of cred­it stan­dards for loans to firms, but at a slow­er pace than in the sec­ond quarter.
Pic 4

EEA Firms’ Net Demand for Loans Hits an All Time Low Since the Start of the BLS in 2003

  • Since the start of the BLS in 2003, the net decrease in loan demand for SMEs (-40.0%) and long-term loans (-46.0%) was the strongest net decrease in demand record­ed. The net decrease in demand for loans to large firms (-34.0%) and for short-term loans (-22.0%) remained slight­ly more lim­it­ed than dur­ing the glob­al finan­cial cri­sis. The decline in net demand reflects the impact of ris­ing inter­est rates on loan demand and eco­nom­ic growth. Fixed invest­ment also had a strong damp­en­ing impact on loan demand, mir­rored by a strong net decrease in demand for long-term loans. Low­er financ­ing needs for M&A activ­i­ty, avail­able inter­nal fund­ing with improved cor­po­rate prof­its, and, to a small­er extent, debt secu­ri­ties issuance also con­tributed to firms’ reduced loan demand. In Q3 2023, banks expect a fur­ther net decrease in demand for loans to firms, but much small­er than in Q2.
Pic 5
Pic 16
Pic 7

Glob­al Fundrais­ing for Pri­vate Cred­it Hits Sev­en-Year Low in 1H 2023

Pic 8
  • Pri­vate cred­it fund man­agers remain qui­et­ly con­fi­dent that the U.S. debt mar­kets can retain investor inter­est, part­ly because high­er inter­est rates have failed to cre­ate the wide­spread dis­tress that many pre­dict­ed – mar­ket sources tend to side with a sur­vey by Kroll Bond Rat­ing Agency sug­gest­ing that a dis­tressed wave was unlike­ly to be build­ing since it would most like­ly have already appeared.
  • Sub­or­di­nat­ed and mez­za­nine debt strate­gies are tak­ing a greater share of investor dol­lars. There is also a con­cert­ed push into spe­cial­ty finance areas – either asset-based or asset-backed – with real estate a grow­ing area of inter­est. KKR raised $2.1 bil­lion for its first ded­i­cat­ed asset-based finance fund last year, and accord­ing to a KKR white paper on the sub­ject, the pri­vate asset-based finance asset class is expect­ed to grow from $5.2 tril­lion to $7.7 tril­lion by 2027.
  • Jason Strife, head of junior cap­i­tal and pri­vate equi­ty solu­tions at Churchill Asset Man­age­ment (“Churchill”), says its junior cap­i­tal deal flow has actu­al­ly increased from last year as spon­sors are focused on struc­tur­ing deals cor­rect­ly in the high­er rate envi­ron­ment, and in many instances, look­ing for fixed cash and PIK coupons. Randy Schwim­mer, co-head of senior lend­ing at Churchill cites two main rea­sons why spon­sors are look­ing for junior debt. First, the LBO financ­ing that is get­ting done today is for busi­ness­es in good sec­tors”, where pur­chase price mul­ti­ples have stayed rel­a­tive­ly steady, and yet the amount of lever­age that can be put on those busi­ness­es giv­en high­er inter­est rates is much less. The whole cap­i­tal struc­ture has gone in favor of lenders and made it dif­fi­cult for pri­vate equi­ty spon­sors who need to put in more cash,” Randy says. Sec­ond, the fundrais­ing for PE has also slowed, leav­ing spon­sors ask­ing for some junior cap­i­tal to bridge that gap between equi­ty they need to put in and the senior debt.
Pic 9

Chap­ter 11 Bank­rupt­cy Dis­tress Indi­ca­tors Hit Mul­ti-Year Highs, Accord­ing to the Newest Polsinel­li-TrBK Dis­tress Indices Report

Pic 10
  • This is a major devel­op­ment over Q1 2023 and even the past few years,” said Jere­my John­son, a bank­rupt­cy and restruc­tur­ing attor­ney at Polsinel­li, a law firm with a focus on bank­rupt­cies. It demon­strates a mate­r­i­al increase in fil­ings across the board and is a sign of sig­nif­i­cant finan­cial dis­tress in the mar­ket. Sev­er­al [Chap­ter 11 bank­rupt­cy dis­tress] indices had been creep­ing up the last few quar­ters, but the wave of fil­ings we didn’t see last quar­ter is now being reflect­ed in the actu­al data.” The growth in fil­ings is reflec­tive of more fam­i­lies and busi­ness­es fac­ing surg­ing debt loads due to ris­ing inter­est rates, infla­tion, and increased bor­row­ing costs,” Amer­i­can Bank­rupt­cy Insti­tute’s exec­u­tive direc­tor Amy Quack­en­boss said in a statement.
  • Real estate con­tin­ues to expe­ri­ence increased dis­tress as the sec­tor has expe­ri­enced the high­est fil­ings in three years. It appears that the long-antic­i­pat­ed real estate dis­tress is now sur­fac­ing. Experts fore­see fil­ing num­bers will con­tin­ue to increase, as there has not been a sig­nif­i­cant reset in com­mer­cial real estate mar­kets and increased inter­est rates will con­tin­ue to put pres­sure on the market.
  • The health­care sec­tor has seen its most dra­mat­ic increase in Chap­ter 11 fil­ings in 13 years. Three years past the begin­ning of the glob­al pan­dem­ic, which caused sig­nif­i­cant dis­tress to the health care sec­tor ear­ly on, it is becom­ing clear that the sec­tor has not yet recov­ered and con­tin­ues to grap­ple with the effects of the pan­dem­ic and espe­cial­ly the end of finan­cial sup­port from the gov­ern­ment. The sec­tor is rapid­ly chang­ing, and we are now find­ing our­selves in a sit­u­a­tion where we have an aging net­work of rur­al hos­pi­tals at the same time as tech­nol­o­gy and telemed­i­cine chang­ing how we deliv­er health care. This com­bi­na­tion is ripe for incred­i­ble trans­for­ma­tion, and we are arguably in the midst of the biggest change in three gen­er­a­tions since the Great Soci­ety Pro­grams of the 1960’s that cre­at­ed Medicare and Med­ic­aid,” com­ments Jere­my John­son of Polsinelli.
Pic 15

Banks’ Total Expo­sure to Com­mer­cial Real Estate (“CRE”) Totals $3.6 Tril­lion, Equiv­a­lent to 20% of Deposits

Pic 13
  • Banks are in dan­ger of cre­at­ing a sce­nario where loss­es on CRE loans trig­ger banks to cut lend­ing, which leads to fur­ther drops in prop­er­ty prices fur­ther lead­ing to more loss­es. Today’s trou­bled mar­ket, fueled by ris­ing inter­est rates and high vacan­cies, fol­lows years of boom times. Banks rough­ly dou­bled their lend­ing to land­lords from 2015 to 2022, to $2.2 tril­lion. Small and medi­um-size banks orig­i­nat­ed many of those loans, and all that lend­ing helped push up prop­er­ty prices. Over the past decade, banks also increased their expo­sure to com­mer­cial real estate by lend­ing to finan­cial com­pa­nies that make loans to some of those same land­lords, and they bought bonds backed by the same types of prop­er­ties. How­ev­er, the vol­ume of com­mer­cial prop­er­ty sales in July was down 74% from a year ear­li­er, and sales of down­town office build­ings hit the low­est lev­el in at least two decades, accord­ing to data provider MSCI Real Assets. When deals begin again, they will be at far low­er prices, which will shock banks, said Michael Com­para­to, head of com­mer­cial real estate at Ben­e­fit Street Part­ners, a debt-focused asset man­ag­er. It’s going to be real­ly nasty,” he said. Besides banks, lenders such as pri­vate debt funds, mort­gage REITs and bond investors can also pro­vide fund­ing – but many of them are financed by banks and can­not get loans. We are see­ing a seri­ous cred­it crunch devel­op­ing,” said Ran Eliasaf, man­ag­ing part­ner of North­wind Group, a pri­vate real-estate lender.
Pic 14

What­ev­er Lend­ing is Still Hap­pen­ing in the CRE Sec­tor is Occur­ring at the Low­est LTVs in 30 years

  • Cer­tain sub­sec­tors such as con­struc­tion lend­ing and office are becom­ing excep­tion­al­ly dif­fi­cult to finance. The degree to which cred­it con­trac­tion has already hap­pened, in advance of the fun­da­men­tal stress­es that are emerg­ing, sug­gests a deep­er and longer peri­od of mar­ket dislocation.


1. WSJ – U.S. Eco­nom­ic Growth Accel­er­ates, Defy­ing Slow­down Expec­ta­tions

2. Fed­er­al Reserve – Senior Loan Offi­cer Opin­ion Sur­vey on Bank Lend­ing Prac­tices

3. U.S. Courts – Quar­ter­ly Bank­rupt­cy Fil­ings

4. ABLAd­vi­sor – August Com­mer­cial Chap­ter 11 Fil­ings Increase 54% Y/Y

5. Reuters – Bank­rupt­cy Fil­ings Surge in First Half of 2023 in U.S., Epiq Says

6. WSJ – Europe Returns to Timid Growth, but Big­ger Head­winds Loom

7. Ares – Alter­na­tive Cred­it Newslet­ter Spring 2023

8. Euro­pean Cen­tral Bank – Bank Lend­ing Sur­vey

9. Pri­vate Debt Investor – U.S. Report Sep­tem­ber 2023

10. Polsinel­li-TRBK Dis­tress Indices Report – Dis­tress Indices Spike in Q2 – Chap­ter 11, Health Care and Real Estate Reach­ing Mul­ti-Year Highs

11. WSJ – Real-Estate Doom Loop Threat­ens America’s Banks

Is your com­pa­ny per­form­ing like it should?