The corporate debt market is beginning to follow the public equity market's lead in decoupling from the real economy.
Why it matters: Private equity and its lenders spent 2009 staring into the abyss. In 2020, they're just pretending it doesn't exist.
Driving the news: KKR reportedly is prepping a $2.75 billion dividend recap for Epicor Software, a portfolio company it tried and failed to sell last year. It would be the first such deal since before the pandemic began.
- The argument for this deal is that KKR has cut Epicor's leverage load since acquiring it from Apax Partners in 2016, and that it has strong recurring revenue and cash flow.
- The argument against this deal is that Epicor is selling enterprise software in the midst of a severe recession, with a particular focus on retail, manufacturing and distribution. It's one thing to keep the ship steady, it's quite another to encumber it with new debt.
The big picture: Overall credit conditions have steadily improved since March, thanks in large part to Fed backstops.
- Private equity execs tell me that high equity prices, not debt availability or terms, is their stumbling block for new deals. As one explained: "The banks obviously know there's a pandemic, but you wouldn't know it when you talk to them about financing a new deal."
- Defaults and bankruptcies have steadily increased since March, but much of that has been siloed in particularly hard-hit industries (retail, hospitality/leisure) or for companies that were already struggling.
- Overall, the percentage of corporate bonds trading at distressed rates has fallen from more than 30% in March to 12.7% in June.
- Within the leveraged loan market specifically, the current default rate is at less than one-third of its 2009 financial crisis peak.