While policymakers and regulators sound the alarm over hidden risks in the fast-growing market for private credit, alternative asset managers running such funds typically explain that they see lower-than-expected default rates and – more importantly – lower loss-given default for three, inter-connected reasons.
First, they claim seniority in the capital structure with first-lien loans secured against operating company assets.
Second, strong covenants in direct-loan documents require corrective action if, for example, a borrower looks likely to see its earnings fall below one times required debt service.
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