Why Nobody Defaults Anymore (w/ Kenny Tang, PitchBook)

0:00Working out is good, right? It's good for the heart. It's good for the mind. But you don't want to be in a workout if you're in private credit or private equity. They've made thousands and thousands of loans over decades. Private credit, obviously smart people, but they haven't had a time like this. Are they equipped, in your opinion, to get these companies into and through a workout? Yeah, that's a great question, Devin.

0:35Welcome back to the FunCast, everybody. We are going to school today. We're going to talk about private credit. We're going to talk about all the things and terminology you need to know to understand the asset class, because there's a lot of lingo in private credit. We're going to talk about what happened in 2026. Things seemed to crack after many years of peace and calm. and then we're going to talk about where the private credit industry is going today. And we've got a friend of the FunCast and a soon-to-be good friend of mine, Kenny Tang, who's a senior director and the head of U.S. credit research at PitchBook.

1:16He knows all the data. He's been on both sides of the table, even did some workouts for some period of time, which may come in handy. So they might call him back in, given the way private credit's going these days. But Kenny, live from New York, it's Kenny Tang. Thanks for being on the pod. Thank you, Devin. Really, really appreciate being on your call. Great. So let's do this. I want to talk about a high, high level. We've got a lot of sophisticated listeners who are in the private equity, private credit industry, but some also who this lingo is pretty confusing. So I want to go through just literally the glossary of private credit and you kind of explain what it is and kind of why it makes sense today.

2:04So private credit versus private equity. We'll start there. These all kind of get thrown in private capital or alternatives bucket. But like what's the basic difference between private credit and private equity? Okay. Yeah. So private credit is really a loan, right? where a fund is focused in on lending money to borrowers who may or may not be able to get it from a bank, for example. Or maybe for a larger company, it could be an alternative to reaching out to the larger credit markets, such as the broadly syndicated market, for one, or even the bond market as well. So that would be where private credit is, the level of interest in fees or what drives revenues for the investors.

2:57On the other hand, for private equity sponsors, you're looking at investing into companies from an equity perspective. So you're basically the owner of the company, whereby a portion of that company likely is going to be financed with debt. So it does come hand in hand. actually private equity and private credit or if you're a larger company it could be a a bond piece or or even on a on a larger scale the syndicated loan market and let's uh maybe as we talk through this glossary i'm gonna ask you some questions around kind of the history of this as well uh giving your background so uh why the run-up in private credit right there was always uh banks you could get a loan from, but it does seem like after the GFC, the global financial crisis in 2008, 2009, a lot of these loans started to move out of banks and into more private equity-like structures, though, on the credit side.

3:56Maybe talk a little bit about that run-up and why private credit has become such a big asset class over the last 10 or 15 years. Yeah, that's a great question. And it does come from the great financial crisis where there was a little bit more scrutiny on the banks in terms of how much leverage are you taking, how much risk are you taking with these loans. So regulatory issues come up. You have your leverage lending guidelines, for one, where there are some restrictions about what you can and cannot lend, which also means for the borrowers, there's only a limitation about what you can do before you need to maybe tap into equity for one more so than you would want.

4:43So I think starting from there is when investors or lenders, alternate lenders, are looking at this and saying, you know what, we have an opportunity here to fund this market. We can provide this loan. We don't have to go abide by all these regulatory concerns or compliance. So we can provide you with this loan. I think that's probably where it started off. And, you know, it's built up over the last 10 years, maybe even more than that, to a point where it's a normal part of business these days on the credit market side. For people like us, you go back to like Timothy Geithner doing stress tests of banks, right?

5:30And saying like, what is the health of these banks? And there was some concern in those stress tests that maybe they had too much risk on their books and were encouraged with kind of, you know, liquidity levels and other types of, you know, tests they were doing that maybe these loans should be somewhere else. And water finds its own level, right? And, you know, products get created around that. There was interest in making these loans from other types of investors, endowments, foundations, pension funds. And then private credit started to grow inside the large asset gatherers like a Blackstone and KKR, Apollo and others, and then independent shops.

6:05So I would say a lot of our, as we look to put leverage on a company, certainly the banks are in it. And we talked to a lot of banks who like software, but maybe not at the levels they were before. And then there are a lot of these independent shops who will loan you capital that feels like a bank. They're just not using deposits. They're using LP capital to make these loans. And water finds its own level, like I said. So there's more interest in this. And the bio industry grew. The private credit industry grew alongside. Is that fair? Yeah. Yeah, definitely. Definitely. And also, one of the things, as you were talking, I was thinking about was banks also look at returns differently, too.

6:47So they have deposit relationships that if you really think about it, that would usually be the go-to place to go get your financing. But, you know, if there are restrictions or if it doesn't fit the credit target type of a borrower, then, you know, there's only so much you can do. That's where the opportunity comes up for these funds to say, you know what, we can do it. We can maybe charge a little bit more interest or charge a little bit more in fees. And if they're even more sophisticated, take a piece of equity as well. So it creates this new complex and maybe innovative type of an opportunity for lenders.

7:32Yeah, kind of like squeezing a balloon. If it wasn't in the banks, it has to go somewhere. So that air has gone to these private credit institutions. So yeah, you're going to pay a little bit more on SOFR plus something. So you're probably paying a little more on that plus something than you would with a traditional bank. But you might be able to get more flexibility, more total leverage, more terms and other things. And you're kind of paying for that risk. All right, let's keep going through our little glossary here. So if that's private credit versus private equity, like direct lending. A lot of times in our industry, like the same thing has a bunch of different names.

8:09So what's direct lending? Yeah, I, you know, I've always, that's a great question because I've always thought lending is lending. Yeah. All my life is like lending is lending. Why do we have to put a name to it? I mean, if a bank lends directly to, you know, the local supermarket, for example, that's a direct loan. And should that be construed as a direct loan? Probably, yes. But you also can look at it from a fund perspective. Okay, so this is what it is really these days is direct lending is when a non-bank lends you money. That would be the new definition. So private credit and direct lending, synonymous, just like an LBO, a buyout and private equity, could all kind of mean about the same thing.

9:00So nothing special. If somebody says direct lending, they're probably talking about private credit or a non-bank loan of some sort. Correct. All right. You already mentioned this, but like a BSL. What's BSL and the difference between, define it, what does BSL stand for and kind of where does it sit in the private credit world? Yeah. Broadly syndicated loan is what the BSL stands for. It basically represents the credit market where loans that are procured are tradable. And the typical buyer of these loans are CLO funds, for example, BDC funds as well, to some degree, and also banks too. It's tradable.

9:38That makes it more liquid. All right. So what's a CLO and what's a BDC? So a CLO is a collateralized loan obligation. So it's a structured securitization vehicle, which really buys into loans, a portfolio of loans. And it can be in different allocations and different concentrations of sectors where it optimizes the returns from that. And along with it, on the lending side, the amount of risk is tranched out by the credit risk that's being taken. So the first tranche, for example, can be the first tranche out, so they get paid first. And that may be, in many cases, construed as the AAA tranche.

10:26So it's reflecting the credit rating, credit risk for that tranche, all the way to an equity tranche as well. In each of those tranches, there's a little more risk as you go down, but there's a little more return to be compensated for that risk. Yep, exactly. Is that fair? And this is what got us in trouble in 2008, but we'll get to that later. Kind of. BDC. What's a BDC? A BDC is a business development company, and it's registered under the SECs, and it's usually traded. In some cases, you can non-trade it. But it's actually been around for quite a long time. I can probably remember it back in 15, 20 years ago and hearing about these BDC loans for the middle market sector.

11:16And, you know, back then, the size of the funds, if I remember right, were anywhere from 50 to 200 million. American capital being a good example. in the early 2000s, American capital was a BDC, right? Publicly traded, but a lender to private equity. Yep, exactly. Okay. So what about interval fund, evergreen, semi-liquid? What are the, you know, as you hear of these things? Yeah, these are more on the fund, higher level fund side, where, you know, investors can put money into certain types of funds where they may have some flexibility about redeeming if and when they need it. So like an interval fund, basically at a certain point you're allowed to take your money out or it's scheduled in.

12:09Versus an evergreen, at a certain point you can redeem a certain level of your capital back. But there are limitations because the asset class is basically a longer term type and it's not really equity per se. So this is like what we heard a lot about in February and March, where they're putting the gates up. And we're going to get to that, what the gate is. The gate meaning, hey, you invested in this fund and they had a 5 % per quarter limitation on liquidity. So they can only provide liquidity up to 5 % per quarter. Meaning it would take 20 quarters for you to get all your money out if they followed that, right?

12:50So the reason to do that is they've got a long-dated loan, maybe a three-, five-, seven-year loan with somebody, and you can ask for liquidity. So there can't be a run on the fund, given that it's illiquid, largely illiquid. That's the proper way to phrase it as well. It was kind of sort of a mini-run back early, if I remember right, it was Q1. Yeah, we heard a lot about Cliffwater and B-Cred and all these things that they were getting. these massive requests for redemptions. So they put the gates up. I was like, well, no, no, they didn't put the gate up. They just said, no, we have a 5 % limit, and you signed up for that.

13:29We can't give you 15%. Now, maybe they got creative to kind of calm people down, but these are the things. An interval fund or a semi-liquid fund means there is a schedule and a percentage at which you can ask for some liquidity. Yep. And then what's about Evergreen? Is Evergreen the opposite? Oh, yeah, that's right. Evergreen is really just not really having a whole period, right? So you are essentially, you can invest in it and it just continues on an ongoing basis. It's like a 10-year fund, like a typical private equity fund. It just goes on and on and on. And there's liquidity along the way and mark-to-markets.

14:05And you can kind of get paid out part or in whole along the way through other liquidity mechanisms. Right. And that helps, especially if you're looking at long-dated type assets and you're continuing with it. And so long as it's making you good returns, it doesn't put you on the hold to sell it if it's not necessary. All right. What about CovLite, which is the shortening of Covenant Lite? So we hear a lot about CovLite loans. Yes. What does CovLite mean? That is mainstream number one. So basically, virtually all loans these days are covenant light, but there are some. There's still some with covenants in place.

14:50I'm a covenant person. I've always drafted up structured covenants, so I do miss them a lot, number one. But essentially, what you're seeing today is credit agreements on loans, especially on the broadly syndicated BSL market. You don't see covenants. And those measures or metrics are really for the lenders to monitor a company's performance, right? To make sure they don't deviate to or deteriorate to a certain point where there's no underlying collateral value or value to the company. So those things are very important. So if you went back to your old days, right? So you've been on both sides of the table here.

15:29What would be in a list of a typical covenant package? and then what would remain, like what would be the few things that would remain in a COVLITE loan? Yeah, so these days what you see is springing type comments, especially on revolvers. And that's kind of sort of your stopgap on a liquidity basis, just to make sure you have some level of a pull on a borrower. But if I had my druthers and I'm looking at a particular new deal, You know, as it is, I would have a leverage covenant for sure, secured in a total leverage. And I would have a debt service coverage ratio in there at the minimum. And what else?

16:16And those are just the maintenance covenants. Exactly. So we can talk about it later, but there are other covenants that are just as important. And those are, you know, incurrence type covenants and voting rights type covenants. Yeah, so covenant is a way for the lender to have some say if things go haywire, right? You can't do this without our permission. Or if this happens, now you need to come and we need to have a talk. That's right. Which could be the lawyers could get involved, the workout team could get involved or whatever. That covenant is basically you tripped this so you can no longer do business as usual.

16:50You have liquidity is too low. Or again, your EBITDA covenant has been tripped. You said we give you five times trailing EBITDA. Now you're at five and a half times. So now we need to kind of get this loan back into compliance. Yes, exactly. And it's a great way to bring the parties, meaning the borrower and the lenders, back to the table and say, okay, what's going on? You essentially have a covenant default on the loan. And what's wrong? and identify what you need to do to rectify it. If it needs more money or whatever it is, that's the time to talk about it. And you may still be current on your interest and your amortization.

17:39It's just that the ratios are off. And that is their way to say like, hey, sure, you're still paying us the money, but this isn't gone the way we thought it would go. We got to have a conversation. And then you're talking about meeting an amendment. You're talking about forbearance agreements, other kinds of things. All right, what about what's PIC? We hear a lot about PIC and PIC toggles. So PIC stands for what and what's a PIC toggle? Yeah, that is what I've been working on more recently. And, you know, first of all, PIC means paid in kind. You know, essentially what's happening in a PIC loan is either a portion or all of the interest on the loan is basically accrued and not paid out, but it's accrued to the balance.

18:24And then once that loan matures, that's when it's due along with the remaining principal. So what does that do for many companies? It saves them the need to pay interest right up front. And there's two ways you can look at it. One is you can look at it from a distress basis. Companies doesn't have the cash flows, and therefore you need some breathing room until such time. Or you can see it as an opportunity for a company to grow. So you see that a lot more with software-type loans, for example. Yeah, so you're basically saying from the beginning of the loan, right, when it's the inception of the loan.

19:03And there's lots of debates about, oh, this percentage of debt is picking. It's like, well, it was agreed to pick from the beginning. They didn't start picking later on because they were in distress. A lot of these loans from the beginning were, hey, it's 10 % interest, so for plus 5.5 or something. But yeah, it's just going to accrue. Just like a private equity investment, oftentimes, it's a principal plus an accrued dividend. You're not paying current interest on the preferred stock of a private equity investment. It just accrues over time. Some loans do the same thing. So it frees up your cash to make other investments in things that hopefully are generating more than an 8 % or 10 % return.

19:44Like if you basically never had to pay your mortgage interest, you just let it roll. and at the end of the mortgage, you just paid it all off at the same time. That's what picking is. And then what's a pick toggle? Ah, okay. Yeah, we're getting more complex now. Yeah, I know. This is fun. Yeah, so a pick toggle is when a borrower and the lender, they agree that in case they need to pick a loan, if X happens or not even, Like, if they choose, if, you know, at a certain point that it's best for them to pick the interest, then they have that selection. They say, hey, lender, I'd like to just defer my interest at this time.

20:28So I will toggle the loan. So you have that on and off. It's like a toggle on and off, an on and off toggle. Like, hey, for the next six months, we're going to pick the interest. And that, again, was probably set up at the very inception of the loan at the borrower's discretion. Do you want to pay the interest or do you want to pick it? And the risk the lender would take is if the business appears to be heading in distress, having it pick is dangerous. They want the cash up front. So they're kind of taking that risk. All right. What would be amend and extend or what we like to call amend and pretend?

21:04So what does amend and extend mean? Yeah. So an amend and extend is when a loan is coming due. So it's maturity date. Let's say it's due at the end of the year, December 31st. And what you want to do is you want to refinance your loan. And, you know, one of the easiest ways to do it is just continue on the loan. You know, and what you do by the amendment is you're amending the maturity date to a later date. So, you know, that would be the easiest way to do it. And hopefully, as thinking from a workout perspective now, just make sure you're renewing the lien as well. Yeah. So basically, hey, I owe you.

21:49We have a$5 million loan. I owe it to you at the end of the year. I've been paying my interest in some amortization. I owe you$5 million at the end of the year. I could refinance it with a new lender. Maybe for whatever reason that's not going to happen. Everybody knows it would be too hard. It's a tough market. The business maybe hasn't performed quite well. The lender and the borrower get together and say, hey, let's push this out a year. And so you amend the loan and then you extend it out one more year. And then you probably have to pay some fees and penalties and maybe interest goes up or some other things.

22:19You're not going to get that for free. But there's going to be some negotiation between the borrower and the lender around that. And there's lots of discussion around kind of pushing out this maturity wall and other things right now, which we're going to get to in a few minutes. So a lot of talk about LMEs right now. I'm not even sure I know what an LME is. I can't really say either, but it is essentially liability management exchange is what it is. I usually go by liability management transaction. And the easy way to say it is really like when a company is going under certain distress, actually, it doesn't even have to be distressed.

22:56When a company at a certain point wants to renegotiate the terms of a loan, they can do it out of court. meaning they don't have to file for bankruptcy for it. They can just say, go to the lenders, say, you know what, let's talk about whether we can do this or not. Now, if you have a broadly syndicated loan where there's more than one lender, let's say 10 lenders or more, then not everyone is going to be in agreement with you. Because, you know, I think you should just continue as is. I'm not agreeing with your proposal here. I don't want to participate. and then you have a few who may want to do it.

23:36So to the extent that all of the credit document compliance is met, then there could be ways that companies can do an LME transaction and kind of cram down on the non-consenting lenders. And then you have this whole change in the whole debt structure now that basically, you know, in many of the more recent cases, lenders are actually losing, you know, taking a loss on it. Yeah. If you Google LME, you'll see lots of examples on the press this year about these things. Never good for the lender. Maybe a reason not to, you know, have cov-light loans and maybe pay more attention to the documentation.

24:17But when things are blowing and going, the borrower often has a lot of leeway and authority in the negotiation. And when money was free, maybe there was some oversight on stopping or being able to block one of these LMEs, but creative borrowers, certainly going to be hard to get a loan from those same group of lenders again if you pull this off or do this to them. But at the same time, it's something that they're capable of doing in a difficult situation to try and give themselves some breathing room. All right, let's end with one more because you were on this side of the table and an earlier part of your career was like, what's a workout?

24:52If you've been told you're in workout, I mean, working out's good, right? It's good for the heart. It's good for the mind. but you don't want to be in work out if you're in private credit or private equity. So what's worked out from your experience? Work out is when a loan is risky enough that a full recovery is at risk or the likelihood of a company surviving a bankruptcy or going into bankruptcy is quite likely. And so what happens from a lender's perspective or a bank where I used to work is you go from the relationship banker group and it gets moved to the workout group, which takes on a different tactic.

25:41And their tactic is really to say, OK, we have this loan. What can we do to make sure we recover all of our investments on that? So, you know, all the things that we would look at as a workout person is to make sure we know what our rights are under the credit agreement. You know, what's our underlying collateral? What can we get back? And what's the prospects of this company remaining a viable business? And those things are key. And how you manage that, you know, is going to highly determine what kind of recovery you're going to get at the end of the day. Here's my workout. Yeah. So this is just picture Kenny doing this to me in the early 2000s.

26:26I wouldn't do that to you. We were put in work out on a deal. So we were going to take a company public, not we. I mean, many jobs ago and many companies ago. We were going to take a company public in the dot-com. It did not go public. The window closed. We found the business had all kinds of adjusted EBITDA. I mean, more so than probably we understood. It was a big M &A roll-up deal. And, yeah, we had too much debt. not enough EBITDA. So we went from the coverage guy, the relationship lender at the club of lenders we were with, and they wanted to play golf with you. They wanted to take you out to dinner.

27:01They wanted to come to maybe show up at a board meeting every once in a while and shake your hand and talk about the next deal you were going to give them to loan. Pretty soon, I got you to get handed over to Workout. The guy at Workout wears a mouth guard at night because he grinds his teeth. So he would come in. I'd fly down there every month to meet with a workout guy and the CFO because our CEO claimed he had a heart murmur and quit because this business was not going to work out too well. And he was too stressed out through all the layoffs and other things we had to do to right-size the business.

27:33This guy, Scott, would scream at me every month from across the table. And there's like a little vein in his forehead that would just like bulge because how could you do this? You guys are idiots. this business isn't doing well you can't pay your interest like what the hell um and every every month i would take the keys to the front door of our office and i would slide them across the table to him and say hey scott i'm working for you right now the equity is cooked here yeah so like me and the cfo are working for you so if you want to take this over and you want to run it please do and then he would say hey hey hey let's let's not do that and then i would continue for one more month and I'd run the business for them.

28:13And we wound up recouping maybe 60 or 70 cents on the dollar for the lenders, zero for the equity holders. But it was a very different tenor, a very different level of scrutiny and a different level of expectation when you go from a performing loan to a non-performing loan. You get put in the workout group. Question I'll have for you as we get deeper into this is, do private credit firms have that workout muscle the way that traditional bank lenders did, right? Because this is relatively new to private credit that we're in kind of a downturn on the credit side. And do they have the capabilities to like really drive work out the way the banks used to?

28:50So, all right, that was a great 101, great introduction, Kenny, good way to get us warmed up and also to teach the listeners all the lingo that lives in private credit. So let's do this. So you're the head of credit research at PitchBook. You see all the data. You guys have bought lots of credit data, bought companies that have access to a lot of this stuff. So you've got everything. We had this huge run-up since the GFC in private credit. That seemed to accelerate post-COVID. So from hundreds of billions to maybe, are we in the trillions of private credit in terms of total AUM? It just grew very, very fast.

29:27And as equity grew, private credit grew alongside it. But it is a massive amount of capital in private credit. often, hey, this is safer than equity. It has a nice yield, more so than a bank loan. And these are professionals. These are solid businesses. It performs like typical good quality credit, other loans, just with more yield. Whether that was totally true or not, who knows? But certainly, hey, these are professional investors. The default rates are relatively low and the interest is relatively high comparatively. Something cracked earlier this year, 2026, the bloom kind of fell off the private credit rows.

30:13Lots of headlines in Q1, certainly coming out of cesspocalypse given the concentration of private equity in software and many of these very large loans with a lot of take privates and other things. And at very aggressive multiples given software businesses' ability to cash flow and potentially pay off the loan in a down cycle, given their cash flow dynamics. People got very comfortable loaning to software businesses. So from where you sit, what happened in 2026 up till now? Walk us through kind of the timeline of what you saw happening in private credit. What were the arguments, you know, pro and con?

30:53What was actually happening? What are you seeing in the data? So let's do that. And then the next segment we'll talk about where we're headed from here, but really focus on that run up and then kind of the cracks in the armor. Yeah. So, Devin, on that, I think the private credit market was actually seeing some signs that the latter part of 2025, as a matter of fact, where it kind of led into it, where at a certain point, and I'll get into this a little bit further or later is the software announcements in February kind of exacerbated it exponentially. But it was already happening from what you've seen.

31:35It was already happening. Yeah. Walk us through that. What were you seeing and what does that mean? We were seeing a rising level of PIC loans, number one. We can't exactly tell whether these are from an opportunistic basis or on a distressed basis. Right. So, you know, but we did see that the level was rising. Meaning people had pick toggles and they were choosing to toggle to pick. Choosing to toggle. Right. Right. And we've seen that grow. And I was like, OK, this is interesting. You know, it's getting to a level. And at the same time, the second half of 2025 is when you saw spreads come down.

32:19So actually, there was some level of opportunities for the credit markets, for borrowers to refinance out if they haven't already, especially in light of the Fed raising rates in 22, where companies were still struggling through. Now was an opportune time for them to refinance or take care of that M &A transaction while they can. So that was what happened through 2025. And the expectation, even at that time, was we should be anticipating M &A activity to pick up in 2026. So two things actually impacted the private credit market, I think. One is the software AI disruption issue in February when Anthropic had mentioned they released Claude, the new version of Claude.

33:19And it was just impacting the whole market across the board. And then the second one was really the Middle Eastern war. When did that start? March, I think. I think it's like a watch. Yeah, so we had this like, we had Claude Cowork comes out in February, meaning everybody non-programmer has access to this machine that's like, oh my goodness. The lenders are like, they care about existential risk. Right. Right? Like they can do fine in a wind down if the business can cash flow. And that's been the argument around software is, hey, we could just cut sales and marketing R &D and have 60 % cash flow margins and we could pay off this loan even in a really bad scenario.

34:03What happened in February was, oh, these things might actually just go out of business. They might be obliterated by that. Largely overdone, but that certainly was a reaction. So a lot of scrutiny on software all of a sudden. And also a lot of the software loans underperforming on the big end. And then, yeah, then we have the halo trade, hard assets, low obsolescence. So people cycle into this hard assets, low absolescence trade coming out of the AI scare right into the new version of the Gulf War with Iran here. So then you have oil spikes and supply shocks and things like that. So, yeah, it got really hairy there in March.

34:50But just because the headlines were bad, was the underlying data getting worse? It actually was. Okay. It was getting worse. And, you know, let me just pull back. The other part that we were anticipating was interest rates were going to go down as well. And, you know, obviously that's not happening. And as we know this week, we'll find out soon, you know, will interest rates go up? Will the Fed raise rates? So that'll put a little bit more pressure across the board for everyone. And we'll see what happens there. But yeah, absolutely. I think you're right. And when Anthropic made their announcements, there was probably my thought process or how I viewed the market reaction was basically, what do we do now?

35:48This came across a little bit sooner than we anticipated. Now we have to deal with it. What do we do now? And that's when you saw the market just go down. Looking at the BSL market, bid prices went down from 94 to 87, like straight down. So explain to people what that means. So we know a stock price goes down or the valuation of a company goes down. But what does that mean in credit terms? So on the BSL market, the loans are traded. And there's a mark on it. There's a valuation on the loans for all of the loans in the VSL market, whether it's liquid meaning traded widely or if it's just narrowly held, then it doesn't trade that much.

36:34But there's still some level of value to it. You could buy a dollar of credit for 84 cents. Yeah, exactly. So it's looked at from 80 cents on the cents basis. So it's 87 % of what the par value loan is, if that makes sense. And unlike private equity, you can't see it every day. A lot of these loans in the BSL, broadly syndicated loan market, have a price that's public. Yeah, exactly. And that's what makes that market liquid and also popular too, is because you can trade in and out of it. But obviously the trading price can be affected quite quickly, especially with a big sell-off like that. And understand, if the loan is worth less than a dollar, the equity is worth zero.

37:28The only time the loan is worth less than a dollar is if you can't pay back all of the loan. If you can't pay back all the loan, you can't pay any of the equity. Right? Right. Yeah. Yeah. So this basically means in a business where the debt is trading below par, you'd expect the equity to be wiped out. Whether private equity investors were right, had those assets down, held at zero, that's a whole other story we could have a podcast about. Don't know. But you could see, hey, this loan on this company is trading at$0.80. So that would mean the equity's got to be worthless. Yeah, exactly. Exactly.

38:10All right. So you're seeing all this held out. And like 71 % of lenders in your survey, you guys did a survey of lenders at PitchBook, said software was the least favorable place to put credit in that this is just too hard. We don't know. And we've seen that in our world. We live at a smaller end of the world, but very large software deals. You've seen a lot fewer take privates this year than in prior years, because if you do a$2 billion take private, the expectation is probably getting a billion of that in debt, and it's just not available for software right now. So you have to over-equitize these things, which is going to put pressure on the returns because you can't get the loans.

38:47You may not be able to get any of it, or you may be getting at a much lower level, or you may have a lot of covenants you may not necessarily want to agree to. So it's just not attractive enough. So this is what you're seeing play out in the spring as all this is happening. Yeah. Yeah. And the unfortunate part is that it hit across the software sector, right? It wasn't like, okay, these software loans are good over here, or, you know, we can disregard it. They're okay. Let's focus on the bad ones. But no, it kind of hit across the board. And even with the good software borrowers, their pricing, if and when they needed refinancing or needed to finance anything, they're still paying the extra premium fund.

39:31So here's, we were joking in our prior conversations about this, that nobody defaults anymore though, right? So you would think with all this stress and these loans trading at discounts, there'd be big defaults. So I think, you know, almost 12 % of loans, you know, given your research, trade below 90. And software is half of that, whether that's true today or, you know, it's, you know, broadly true this year. But the default rates are still under 1%. Yeah. So where are all the defaults if there's this much stress in the system, Kenny? Yeah. So even if there were defaults, more of them are becoming LME transactions, which we kind of defined earlier on.

40:17And those are more predominant these days and much easier to get done than to do that traditional bankruptcy filing. Yeah, that's for sure. Even though default rates right now are low, and that's reflecting the BSL market, by the way, not the private credit market. So that 0.87 % default rate for traditional type defaults, it is low. I think the average is like 10-year average is about close to 1.5%, which is also low, by the way. it's been a great 10 years yeah for 10 years it's probably the wrong 10 years to like get the average but you know totally understood that's true probably about to change a little bit yeah but here's another 92 % of this market again I'm just citing your research back to you 92 % of this market is cov light right there are no covenants to trip so if you can't trip a covenant does the fault even mean anything anymore right if you have so few covenants.

41:26Yeah, yeah, that's exactly right. So you have that as well, where because you can't call it default or a covenant default, and moreover, when it even comes to that point where they do need to come back to the table, they meaning the borrower, is they want to come in and say, okay, well, let's renegotiate. And at that point, there's a likelihood, especially if it's carved light and given the particulars, there's a likelihood that they could do an LME transaction. And guess what? If you're not one of those negotiating early with them, then you could be left out of that deal, and it may not be to your advantage.

42:11Yeah, so that's what's happening on that front. But one thing you did mention, Devin, that 11 % distress ratio or stress ratio, So anything greater than less than$0.90 on a dollar, well, that's 11%. $0.80 on a dollar and below is about 6.5%, which is actually a pretty high number, close to what it was in 2022 when the Fed funds rates were increased significantly. So the stress is there. And maybe the question is whether it's going to come in the next three to six months. Is it going to come to fruition that these distressed credits are eventually going to move into that default or LME-type default?

42:59So if you're an LP in a credit fund, and you've been on all sides of the table over your career in this, what are you looking for now? Like, are there canaries in the coal mine? Are there data points that you want to really pay attention to as the quarterly reports come in or as you're checking the pricing on some of these loans? Like, what are the things that are on your checklist of I should be worried here or I should be really worried? Yeah, so if you have access to the financials, which I presume you do as an LP, then it may make sense to just take a look at the underlying investments or the companies and see how they're doing.

43:43And also, on top of that, is to really have a gauge of how much software sensitivity they have. Are they sensitive to any AI disruption and are they doing anything about it? Are they proactively investing in the company to make sure they're competitive? That's one. And the other one is how sensitive are they to geopolitical change, inflation, and also global trade too. If you are in need of certain raw materials from overseas and that spigot shuts, are you going to survive? Do you have an alternative? I mean, those things would go in my mind to say, OK, is this portfolio, how much stress or sensitivity does this portfolio have that could put this into a distress situation?

44:34One thing we learned in the GFC, love your opinion on this, is that some lenders move real fast and things were ugly and cents on the dollar. Some lenders in other situations, maybe even bigger situations where there was more risk, actually kind of played ball. Say, listen, the private equity firm has an incentive to make this work. We don't want to come in and take the keys and move too fast. let's amend the credit agreement, cut some deals, maybe swat some debt for equity, but let's let the owner run this and drive this thing. And generally, like the defaults coming out of GFC for the people who are patient, I don't have the data, I'm going back on anecdotal stuff, weren't as bad as everybody thought in the fall of 2008 into 2009, that things kind of worked itself out.

45:25And if you just sat tight, it wasn't a great outcome, but it wasn't maybe as bad. what are you seeing today um are lenders moving in fast should they be moving in faster and kind of dictating the plays here a little bit obviously they're in some pretty cov late situations so maybe they don't have the power to do that but what are some things a lp a credit lp can do to get ahead of some of this stuff yeah you can take not really uh about the gfc period but really about the 2022 period when interest rates went up significantly. And what happened there with the carb-like deals? Essentially, we saw a huge plot of pile of LME transactions coming in to do exactly that.

46:11It's like, okay, the sponsors are coming in, the creditors are also coming in, and it's disgusting. Okay, what can we do about this? Do you want the keys or do you want to try to work something out? I think that was a good representation of what could transpire as we look at the next potential recession or trough period. So we talked a little bit about this. Commercial lending to private equity deals was much more prevalent before the GFC, heading into the GFC and during the dot-com. So late 90s and early 2000s, and then heading up into the GFC. they knew the workout playbook. They had been around for a long time.

46:58They had made thousands and thousands of loans over decades. Private credit, obviously smart people, the right incentives, all with credit backgrounds and things. But they haven't had a time like this in a meaningful way, maybe that bad blip in 2022. Are they equipped, in your opinion, to get these companies into and through a workout? Because it's been a while since the industry's really had to exercise those muscles. Yeah, that's a great question, Devin. And I also wonder about that too. I mean, is just having a regular credit acumen, is that sufficient to get transactions done, whether there's got hair on it or not?

47:47Right. So it does cross my mind. What can firms do? What can funds do to restructure these deals, these types of restructions? Do they have the bells and whistles to actually last through the next phase of this company, the reemergence of this company, whether you actually went into bankruptcy or not? Right. You know, I think it's a good question. I don't know if I have the full answer to it. but certainly the way of restructuring deals are quite a bit different from back then. If a payment default happened, then it's 100 % vote. All lenders are involved. Now it's like if payment default occurs, then you're at this point where is it just the majority vote?

48:35Do I even have a say in this? It does make it a little bit difficult, but it moves quick. It does move quick. That's the only offset. Well, hey, if Scott from PWC's workout group is still around and hasn't ground all his teeth to dust, he was pretty effective 25 years ago screaming at me. So maybe they've got to hire Scott to come in and yell at some people. All right, so let's do this. Transport yourself back, Kenny, to Fleet Bank and BNY Mellon. Remember when BNY Mellon was still a thing? Sitting across the table from a borrower. so what did that teach you about what's going on now and where things are headed so obviously you're on the research side with pitch book telling us what's going on and looking at this but kind of go back to that part of your career when you were across the table from from a borrower what have you learned and we're going to talk about where we headed from here like what's your research showing and what's your own experience of what happens in times like these over the next 12, 24 months?

49:37Yeah, that's a great question. Bringing back memories here, some are good. Some are questionable. But yeah, so bringing back to Fleet Bank was when I really started my career in commercial banking. Now, I was an underwriter, analyst slash portfolio manager working in the middle market space. And this was in Fairfield County, Connecticut. I don't know if you're familiar. Yeah. You know, Southwestern Connecticut slash also Westchester. We had some market there too. And we catered to middle market companies. Sometimes they're the local tire shop, the local supermarkets. And some are actually large companies, you know, that eventually became syndicated deals.

50:27And it was a really good experience for me. Things I learned, really, was really about fundamental credit analysis, making sure you understand leverage, you understand liquidity, when deterioration happens. Like if there's an inventory built, you question that, right? It's like, why is it growing? Is it because of businesses growing or is it just not selling? You know, cash flows. So one of the things I still keep in my mind to this day is even if you look at revenues as a number, which is great, you look at revenues, if it's growing, great. But even further below that, you should be looking at the volume of business being done.

51:11I think that's been missing more recently. How many subscribers are there? Was it just price increases and maybe pass-through of additional costs? There's actually the units going up, the number of customers going up, those things. Is that what you're talking about? Yeah, exactly. So if you're a software company and you have 10 ,000 subscribers this month, the next month you have 9 ,000, but your revenue stays the same, you've got to question what happens to the other 1 ,000 subscribers. Was it because of the price increase that you lost 1 ,000 subscribers? Yeah, things like that I think is important for us to remember to analyze those things.

51:49And obviously, liquidity is a key driver of how a company is going to do. And if you're seeing deteriorating liquidity, then there's a likelihood that at some point, whether a business is growing or not growing, it's going to be an issue. Yeah. And then you ran debt recoveries at S &P. So, what did you see in your S &P days that you still draw on as you're looking at this research and trying to predict what happens in the future? Yeah. At S &P, I was working on debt recovery ratings. So, we assigned ratings to companies' debt facilities. And along with that is we look at the probability of default.

52:39And then we also look at what's the likelihood of a recovery on that debt in the case of a default. So the type of kind of recovery we get is going to either get it notched up or notched down. So if it's 100 % recovery, even in the default case, then you would notch that rating up. So it binds with your credit rating. So one of the things I learned there is that the kind of debt structure, the kind of leverage, and the underlying cash flow that drives valuations is going to determine what your ultimate recovery is. Those are the key ones. Of course, there's other factors. But in general, those three or four actually drive most of the recovery.

53:30Yeah. So one thing people who follow the private credit market have predicted what is happening is that the maturity walls are getting pushed out. So 28, 29, 30 were going to be big maturities. That appears to be getting pushed out to 2031, 2032, maybe like a half a trillion dollars in sponsor debt getting pushed out, the maturity wall getting pushed out. So is that a good thing that people are just like being rational and saying, hey, let's not, you know, let's give these companies some time to execute? Does that make you nervous? Like is the research you're working on and unpacking, you know, what's in there?

54:08You know, what's your view on this? Yeah, what you're making me think about is one of the pieces that our one of our teams had written about. And it was I forget the name now, but it's about zombie companies. and focused on PE companies and how there's about 13 ,000 companies out there that's really waiting to be who are very close to their exit period. And nothing's been done yet, and it's about time to do it. What do you do in those situations? I think in those cases, along with levered-type companies, those are the ones that we need to be concerned about, right? And along with that is the maturity.

54:53if pushing out the debt to 2031 or 2032 is the way to do it just to kick the can down the road, that's great so long as they can continue to generate the cash flows that they need to service it. But not all of the companies are in that situation. And that's where it doesn't matter, right? So, you know, in some cases, it's great. But in some other cases, you know, it's inevitable that that type of company would be in further distress. Yeah, if you're cash flowing, you're current on your AM or you're current on your debt service interest, and you're generally in compliance with the covenants, as light as they might be, or maybe you've reset the covenants or things.

55:41I can understand a lender kind of sitting tight. I don't think there are a lot of lenders who are pushing out maturities on distressed assets. I think the lenders are jumping in and trying to recover as much as they possibly can at this point, trying to figure out a way home. So maybe on these good, not great cases, it's like, listen, we're not going to try and refinance the debt with another lender at this point. This is a performing loan, maybe not performing great for the equity. But what's another extra year or two of interest here at pretty good interest rates? And maybe there's a default interest rate increase or something.

56:16Perfect. So how does this end? With a bang, with a whimper, five years from now? What are you writing about as you look back at this period? Yeah, that's a good question. What I envision is neither a bang nor a whimper, but in my mind, it's like a huge glacier that's melting and you can't do anything about it. And it's just sliding down. You can't hold it back. You can't refreeze it. It's just coming your way. And we think back as I, what could we have done to protect ourselves or change the course of direction? And that's what I would be thinking about. Things I'm working on now is looking at defaults on the private credit space where we do see some increase in the middle market side.

57:13So companies that have liabilities between 100 to 500 million we are seeing double-digit increases and defaults bankruptcy defaults okay bankruptcy defaults and you know double double-digit increases in the amount increases right not the rate not the rate yep that non-accruals are actually much higher than we think so we just did a piece on non-accruals and what we're seeing is that especially in BDC funds What you're seeing is that some companies have, some BDCs have their investments in non-accrual, but others actually don't on the same loan. And, you know, so basically how do you see, discern the distress of one's view and then the other one is not in distress?

58:03Yeah. Yeah. Before we get to the quick lightning round here, how does the private credit industry kind of get its mojo back and kind of take control of the narrative given how difficult the narrative has been in 2026? after years of, hey, let's pile into this great yield year, especially given, you know, Nas and I and your team have talked a lot about the high net worth and the retail clients, you know, allocating to private credit given the yield attractiveness and the perceived safety of these. Yeah, any ideas if you're talking, you know, giving advice to the industry? How do they get their growth back here?

58:44Yeah, first of all, private credit is not going away. It's such a meaningful part of the credit markets that it just comes hand in hand. Even like now, what you're seeing in debt structures that you see in many cases, you see a BSL loan and then you see a private credit loan and potentially you could see a bond issuance at the same debt structure. So it's not going away. I think it provides a healthy competition for the credit markets. Is there credit risk? Yes, there is credit risk. And you can see some deterioration, as I mentioned. PIC loans are still prevalent in the portfolio. Non-accruals are rising.

59:29Okay, so that's important to point out. Is it going to go up and down? Maybe. But, you know, you go through your troughs and peaks. Because in terms of the retail investment or interest from the retail side, looking here, I mean, it would make sense to at least have a sense of what this business is about. That this is lending. This is a long-term asset. Nothing that you can go in and out that easily. So that's one of the things I think is important to understand, that these types of investments are longer term. and you know sometimes you can write it out i guess sometimes you may may not right depends on the investment yeah and uh i had a research at pitchbook and i and naz if you go back if you know several episodes into the june time frame we didn't we did a piece on you know private equity in your 401k which is mostly around private credit in your 401k and kind of the upside and downside of that kind of how that's playing out and things now with this sitting in private credit like with LPs and GPs and fund lives and things and gates, right?

1:00:39So kind of semi-liquid interval fund type structures. There can't be a run on the bank. I mean, there can. And they could say, like, we don't have to give it to you. But back in the GFC, there could be a run on the bank. There was a run on Silicon Valley Bank a few years ago. So I think that forces people to kind of cool their heads prevail, fail, work something out. Maybe the equity is worthless. Maybe there can be incentives for that management team and some of the equity holders to pay attention and drive a result for the lenders. Maybe the loan is, you know, under par and distressed. But kind of this idea of, like we had in 2008, 2009, that there could be an absolute run on the banks and banks had to be merged and, you know, called to Washington and forced to sign a piece of paper and all these things.

1:01:29Like this is going to work itself out much more in a much, maybe not a good result for some of these loans during this time period. But it's not going to be, hey, everybody get called to Washington. You got to sign a piece of paper. We're going to force some of you to go under things. There may be some failed lenders for sure. But I think given the structures and where the money has been put, you will have some very large institutions lose some money for sure. But you're not having grandma and grandpa's 401k wiped out because they put it all in a bank that went under and there was a run in the bank with bad lending practices.

1:02:08I can't say that universally, but certainly you think of the brand name private credit firms. Do you agree with that? Disagree with that? Please disagree. It will make it much more exciting.

1:02:25Well, in many ways, yes, I do agree with that. I think when you compare the periods, it's just different. The things that the circumstances that we're under today are quite a bit different from the GFC period. Although, inflation rates were high at that time. Interest rates were high at that time as well. I remember spreads being 500 bips, LIBOR spreads. So we're about 360 right now and potentially a little higher this coming week. We're not exactly there yet, but does it have to be par and par with that to be considered a recession or even getting to that point? I don't think we're going to see that type of a scenario this time, but other scenarios I think will come into play, whether it's energy related, whether it's really global competition, global trade issues, maybe war, right?

1:03:26So we are at a sensitive time for war and that could change the markets. Yeah. Well, hey, as they say, may you live in interesting times. So let's get to one question we ask everybody is give me a bet your bonus prediction.

1:03:49Yeah, that's a good question. What's my prediction? Maybe I'll do a soft one. That's all right. I think there's going to be some rise in defaults in the private credit space. As I mentioned before, the stress ratios on the BSL side are also on the high side. So we're probably going to see some defaults rise. This is just me thinking. Probably within the next two years, we'll see that. Yeah. And given that we said a lot of these loans are cov-light. A cov-light, right. To default, you need to be in pretty, the underlying performance of the assets has to be pretty bad. Right, right. So in that regard, to the extent it's cov-light, then what could happen is we'll see a lot more LME transactions come into play.

1:04:41Even in the private credit space, we'll see that. but you know overall in terms of distress which my my gut tells me that it's probably going to increase quite a bit in the next year well soon after this airs we're going to have the head of restructuring from hula and lokian for a second time so well then we'll do like a round table with me you and him uh at the beginning of next year and see how we did all right so final question so i'm sure your parents family members gave you advice as a as a kid and maybe it still rattles around in your brain and maybe you hear yourself saying it despite your best efforts to not take any advice from your parents.

1:05:19So what's some advice you got over during your life that you pass it on to other people? Well, this advice I get pretty much still to this day. And I try to fight it every time. Every time my mom calls, my folks call, and they tell, Kenny, have you done this yet? I was like, not yet. well do it do it okay i'll do it i'll do it and i still to this day i still like try to try to uh you know push it off and i find myself doing that with my kids now and and uh thankfully so far they haven't pushed off that much all right good kenny tang a senior director and the head of u.s credit research at pitchbook thank you so much for spending the last hour with us and walking everybody through from the 101 to I think 401.

1:06:14We may have even gotten into some graduate level coursework there along the way. For more information on PitchBook, a big partner of the FunCast and me and my team at Parker Gale, you can see the links in the show notes. We'll link some of Kenny's research as well there. And the only way other people find this and nerd out like Kenny and I like to do on private credit is if you subscribe on YouTube, Spotify, Apple, or wherever else you listen to podcasts. So I appreciate you spending time with us. Kenny, great to hang out with you. I'm sure we'll be talking again soon and we'll be tracking your predictions.

1:06:54Bye for now. Sounds good. Great. Thank you, Devin. Really appreciate it.

1:07:05And they don't take themselves too seriously. It's not venture capital. It's private equity. It's the private equity fund cast. Pour yourself a drink and have a seat.