KBRA Releases Research – Private Credit: Pulling Rank and the Game of Senior Preferreds in LMEs

KBRA releases research observing how secured lenders have long looked to “Disqualified Stock” provisions in credit documentation to protect them against cash leakage on account of junior ranking instruments. However, lessons from a recent private credit liability management exercise (LME) raised questions regarding the perceived benign nature of permitted junior ranking hybrid instruments.

Key Takeaways

• A recent LME transaction widely discussed in media reports did not exhibit qualities of lender-on-lender gamesmanship, although the transaction does provide a new template for value-shifting transactions.
• A review of a random sampling of credit documents highlights another avenue where stressed borrowers can leverage document terms to shift some value away from credit parties, a matter that is becoming a bigger discussion point in private credit deal negotiations.
• Preferred equity—commonly viewed as nonthreatening to senior lenders—can pull rank if the document allows it, and it appears most could.

Click here to view the report.

Related Publications

• Private Credit: Rate Cuts Will Help Most but Not All Borrowers
• Private Credit: Q2 2024 Middle Market Borrower Surveillance Compendium–EBITDA to the Rescue
• Private Credit Funds: KBRA-Rated Portfolio Displays Stable Credit Performance and Structural Evolution
• Private Credit: Business Development Company (BDC) Ratings Compendium: Second-Quarter 2024
• Private Credit: Khoros’ Potential Default Sprinkled Across Private Credit
• Private Credit: Impact of Pluralsight’s Potential Restructuring Will Be Widely Dispersed and No Effect on Ratings Expected

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1006158

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