UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
8.2 Lessons Learned Due Diligence and Risk Assessment
cally trigger a moratorium of claims or proceed - ings. 7.10 Expedited Restructurings See 7.1 Impact of Insolvency Processes for a description of pre-pack sales. 8. Case Studies and Practical Insights 8.1 Notable Case Studies In general, concerns relating to leakage permis - sions in the covenants and liability manage - ment that apply to syndicated loans also apply to private credit loans. These concerns may be heightened in private credit transactions due to: • the lack of liquidity, which means that private credit lenders cannot easily exit their posi - tions, prompting them to seek stricter terms to protect their investments over the loan’s duration; • private credit lenders often provide bespoke financing solutions tailored to specific bor - rower requirements. In exchange for this customisation and flexibility, stricter cov - enants and terms to ensure that the borrower adheres to agreed-upon financial and opera - tional metrics are required; and • private credit lenders often take a more active role in monitoring and engaging with borrow - ers compared to syndicated lenders. Stricter terms facilitate this involvement, allowing ear - lier intervention if a borrower’s performance deviates from expectations. On Holdco deals, even if there are significant flexibilities in the Opco documents, private credit lenders will require certain flexibilities to be lim - ited at the Holdco level.
Thorough due diligence and robust risk assess - ment are crucial in private credit transactions. Recent deals underscore the need for lenders to deeply understand the borrower’s business model, industry dynamics and financial health to mitigate risks effectively. Covenant Structures The use of covenants remains a critical tool for managing risk. Recent transactions illustrate the trend towards more nuanced covenant struc - tures that balance protection for lenders with operational flexibility for borrowers. Market Adaptability The private credit market is influenced by broader economic conditions, such as interest rate fluctuations and geopolitical events. Recent transactions demonstrate the importance of adaptability, with lenders and borrowers adjust - ing terms and strategies to reflect changing mar - ket conditions. Partnerships and Collaboration Collaboration between private credit lenders and other financial institutions can enhance deal execution and broaden the range of available financing solutions. Recent deals highlight the benefits of strategic partnerships in expanding market reach and leveraging complementary strengths. Focus on ESG ESG considerations are increasingly important in private credit transactions. Recent deals reflect a growing emphasis on incorporating ESG criteria into investment decisions, aligning with broad - er trends towards sustainable and responsible investing.
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