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Scaling the PIK Maturity Wall
?~2/3 of PIK loans held in public BDCs mature between 2026 and 2028 (KBRA bar chart below).
This universe of PIK loans in DL has drifted higher, now represents ~12% (according to two leading sources: Lincoln and KBRA).
Bad-PIK (implemented post-close usually due to borrower cash flow challenges) outweigh Good-PIK (allowing borrowers to use capital for growth, acquisition & CapEx), by par issuance and issuer count. What percentage of the private credit book is Bad-PIK?
Borrowers unable to service debt with cash interest payments creates a negative spiral as principal grows, which can “kick the can” and thus ultimately lower recovery value in the event of default.
The majority of PIK that matures in the next 30 months is likely Bad-PIK.
Good-PIK likely represents the majority of longer dated maturities.
Cash-pay Direct Loans (blue bars in bar chart below)have a normal maturity wall (bell-shape); in contrast to front-loaded PIK maturity wall (yellow bars).
When Bad-PIK maturity date occurs, options narrow quickly for the creditor: refinance at significantly wider spreads (if possible), amend and extend, or restructure.
Expect a wave of amendments, sponsor equity injections, and NAV markdowns across BDC portfolios over the next 30 months.
Discipline always wins in private credit, where resilient businesses, the ability for the company to de-lever, strong covenant protection, and cash coupons always make for a winning formula. The opportunity ahead for disciplined direct lenders is exceptional: wider spreads, better terms, stronger documentation. Lending the right way is rewarding!
Wanted to share what caught my eye as I walked through the data deck with KBRA (my markup, not KBRA's).
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A Discussion with New York's Bankruptcy Judges: Current Issues and Trends 
