(Bloomberg) — Recent failures in the credit markets, including First Brands Group and Tricolor Holdings, have fueled a frenzy around how much risk is sitting in private debt portfolios. But for Ares Management Corp. executives, the losses actually make private credit look good, while presenting an opportunity to snag more deals.
Neither of the collapses are “really impacting our market that much so far,” Kort Schnabel, the chief executive officer of Ares Capital Corp., said on an earnings call for the asset manager’s publicly traded business development company on Tuesday.
On First Brands, “I think this is just one very good public example of something where the broadly syndicated market documents were a little bit looser, and I don’t expect that you would see that occur in one of our transactions,” he said.
Private credit chiefs have been defending their product in recent weeks, arguing the blow-ups were tied to the broadly syndicated and asset-backed securities markets and not indicative of weakness within the $1.7 trillion direct lending industry.
“We also get the benefit when the broadly syndicated market does see reverberations,” Jim Miller, co-head of US direct lending for Ares and president of the BDC, said on the earnings call, adding that can present a moment to take up market share. “That’s a great time for private credit.”
Issues for First Brands arose after the auto-part maker tried to refinance its debt in the broadly syndicated market, but failed to clinch a transaction and lenders requested a quality of earnings report. The company filed for bankruptcy in the weeks after.
Private credit firms are asking for a quality of earnings report for every new transaction, Schnabel said. Documents for direct lending deals also have stricter protections in loan documents, focused on factoring of receivables and off-balance-sheet liabilities, both of which attracted attention in the case of First Brands.
Investors have also been waiting for BDCs — a popular structure for direct lenders to pool their private credit loans — to report earnings and offer insight into the health of portfolios. Given many only report a schedule of investments on a quarterly basis, information in the market can lag.
The fund brought in $338 million of net investment income in the third quarter, down 6.4% compared to the same period last year, according to a regulatory filing. That fell short of average Bloomberg-compiled analyst estimates of $354.9 million.
During the quarter, the BDC’s new investments included a loan to ratings agency Kroll Bond Ratings Agency and a portion of a debt package for Walgreens Boots Alliance Inc.
Direct lenders provided around $4.5 billion of debt financing to support Sycamore Partners’ acquisition of the pharmacy business, which closed in August. Ares’ BDC is housing $100 million of the loan, priced at 7 percentage points over the base rate, according to the filing.
The Ares BDC also added debt tied to soccer club owner Eagle Football Holdings to its list of investments on non-accrual status, meaning the debt is no longer paying out interest, according to the filing. Eagle Football owns clubs including Botafogo, Olympique Lyonnais and RWDM Brussels.
The fund marked the value of a portion of the Eagle Football debt to around 57 cents on the dollar as of Sept. 30, according to filings.
In terms of future investments, Ares is trying to ensure it’s not lending to software companies that might become obsolete in light of artificial intelligence.
“We’re spending a lot more time thinking now about what AI is good at and what it’s not good at to ensure that we continue to build a portfolio that is resistant to disruption,” Schnabel said on the earnings call. “We’re trying to make sure that we’re staying away from, or software companies that are just analyzing third-party data.”
(Updates with new investments in 10th and 11th paragraphs.)
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