By Larry Light, October 27, 2020
Chief Investment Officer, Stuart Katz, discusses how he believes private debt can navigate volatility and what potential challenges may lie ahead for the asset class.
“What’s more, said Stuart Katz, CIO of Robertson Stephens Wealth Management, private loans to middle market companies are more difficult than larger companies to be restructured if they default. Worse, too often the borrowers carry burdensome debt loads, with multiples like net debt that can range in excess of six times earnings before interest, taxes, depreciation, and amortization (EBITDA). That can weigh heavily on a debt holder and endanger its business performance.
And many borrowers, Katz warned, don’t have capital structures that can cushion a company in times of stress, such as a solid equity component. “Fixed income is supposed to provide ballast” to a portfolio, he said. Thus, it’s wise for investors to ensure that the debt issuing funds they’re betting on have solid track records—and that the funds ensure borrowers are subject to strong covenants (restrictions of corporate behavior, such as on how much more debt is permissible).”
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