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From Direct Lending to Barbara Windsor's Chest - The Truth This Friday

Posted on Dec 11, 2020. by NTI

Leo Fletcher-Smith, head of European private credit strategy at advisory firm Aksia wins the prize for our favourite turn of phrase this week. He said: "Restructurings have been a bit of a mess because lenders are trying to catch a rapidly falling knife." Nice.

Unfortunately, Leo, Sir Isaac Newton didn't find fame for no reason. He was all over gravity and due to his fine work with popular fruit we know that the weight of an object does not change as it falls, as long as it remains whole. Therefore, although we loved your quote we have to disqualify it for inaccuracy, as the word 'rapidly' suggests gaining speed and a falling object does not do so. The prize for quote of the week therefore defaults posthumously to Kenneth Williams, who once likened the late Barbara Windsor's chest to "a confectionery counter".

The point Mr Fletcher-Smith was making centred around businesses such as Alcentra, KKR and Pemberton which specialise in making loans to private companies. Such businesses have faced serious losses as the tentacles of Covid pulled already flailing small and medium-sized companies to the ground. Investors have poured money into private credit funds which then make loans to these small businesses (commonly known as 'direct lending') and charge much higher interest rates for the pleasure of doing so.

While central banks have propped up public debt markets, helping larger companies borrow their way out of trouble, smaller businesses reliant on direct lenders have faced more difficulties. The high street has faced serious contraction during 2020 and investors have received very little of their money back. It is hard to feel sorry for the likes of Pemberton and Alcentra, the latter having assets under management of $40. 3 billion at September 2019 globally, with two-thirds of that total managed in Europe. We feel their pain, but move swiftly on.

A good example lies in the ever-growing hole once filled by Debenhams, who borrowed from Alcentra (a subsidiary of BNY Mellon), and also participated in 'debt-for-equity swaps' in Fat Face (oops) and New Look (OOPs). To complete a hat-trick of investments which, if made by a single team at one of the direct lenders, will mean it is the last Christmas unlunch they will not be attending at the company, Alcentra also loaned to our old friends at coffee chain Caffè Nero. 

In a proclamation of glorious understatement one private debt investor said: “A lot of companies are really suffering and as a result direct lenders are struggling. They are dealing with significant impairments or private equity firms are having to put more money into these businesses.” Some credit funds which have invested in the UK high street hurriedly engaged reverse and have been weaving backwards through obstacle after disaster on the road behind them for most of this year, but only a few have got their money back. They have become a domino in the game involving landlords, HMRC, suppliers and long-suffering trade creditors.

One last cheery note on investments, our old friends at Rolls Royce announced today (Friday 11 December) that they have burned through £4.2 billion of cash in 2020, more than the horrendously huge £4 billion that was previously forecast. The aero-engine manufacturer's share price span faster than the fans of a RR Trent 700, having clawed their way back from a low of 38p in October to 134p earlier this month. In early trading today they lost more than 5 per cent, down 7p at 120p. A good buy? More likely a goodbye.

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