Credit bet

Kohlberg Kravis Roberts and The Carlyle Group are scaling up their capabilities in the area of credit investing, positioning themselves to take advantage of the massive amount of debt coming due in the next few years. 

“Globally, even though the economy has gotten a bit better, global deleveraging is going to continue. There’s a substantial amount of covenant lite debt yet to mature carried by zombie businesses,” says Bill Sonneborn, who heads up KKR Asset Management.

Carlyle, led by co-founder and managing director David Rubenstein, is expanding its $19 billion credit programme. The firm’s first step was to centralise the various debt teams under a new leader – Michael Petrick – who will step into the newly created role of global head of credit alternatives and capital markets. 

Petrick, who spent 20 years at Morgan Stanley, will be leading a division that has 24 credit-related funds managed by 57 people. 

“The goal is to bring greater scale to the business,” a Carlyle spokesperson tells PEI. “Carlyle has been involved in credit products for many years and … thinks it can do even better.”

Some of the firm’s credit businesses include: a European leveraged finance team with about €5.4 billion of assets under management across 22 funds; a US leverage finance team with 11 funds and $4.3 billion of AUM; and a mezzanine team with $990 million of assets in two funds. 

KKR has created a distressed investing team that will focus on distressed debt, bankruptcy loans and rescue financing. The team, which is housed in the firm’s $13 billion KKR Asset Management division, raised $800 million in the fourth quarter alone for investments in the space. 

The distressed investment team will be led by executives Jamie Weinstein and Nathaniel Zilkha. Zilkha was moved over from KKR’s North American private equity business.

KKR historically pursued various strategies using capital from its main funds, but has in recent years been moving toward separate funds for different strategies. For example, the firm has been raising an infrastructure fund targeting between $2 billion and $4 billion. 

The firm has also been raising a fund of between $1 billion and $3 billion for mezzanine – high yielding unsecured debt which is often converted to equity via warrants. The mezzanine fund will invest globally in large companies through senior notes, subordinated debt and preferred stocks.

Carlyle last year collected $553 million for its second mezzanine fund. The Blackstone Group, Apollo Management and Goldman Sachs also manage mezzanine funds.

According to information from Standard & Poor’s LCD, financial sponsor-backed leveraged loan maturities in the US alone will grow to nearly $140 billion in 2014 after rising steeply from $1.8 billion in 2010. The massive deleveraging will lead inevitably to some bankruptcies, opening up investment opportunities for bankruptcy loans and acquisition of cheap assets. There is and will continue to be a need for rescue financing, to keep companies out of bankruptcy.