Len Tannenbaum, founder of Tannenbaum Capital Group and former head of Fifth Street Capital, is sounding the alarm on the $1.8 trillion private credit market, describing current conditions as a "canary in the coal mine." He argues that Business Development Companies (BDCs) and non-traded funds are holding private loans marked at 70 to 90 cents on the dollar, a valuation he believes wouldn't hold up if actually tested in the market. Tannenbaum highlights that withdrawal requests across the private credit market have spiked, leading firms like Morgan Stanley and Apollo Global Management to cap investor redemptions from their funds.
The stress in the private credit market is attributed to structural issues, particularly the refinancing of loans originated during the low-interest-rate environment of 2021 and 2022. Companies that borrowed at around 7% all-in are now facing refinancing rates closer to double digits, given the current five-year Treasury yield at 4.15%, ten-year at 4.38%, and 30-year at 4.85%. This has led to an increase in non-accruals and quiet restructuring of troubled loans, with some being converted into PIK (payment-in-kind) securities where interest is paid with more debt instead of cash.
Despite his warnings about the existing market, Tannenbaum sees a significant opportunity. He is launching a new BDC that will focus on lower-middle-market deals, targeting companies with $5 million to $25 million in EBITDA. He believes the next two years represent a "great vintage" for new investments because the current market challenges will lead to wider spreads and tighter covenants. This approach aims to capitalize on new capital being deployed under stricter terms to companies that have already navigated the interest rate reset, distinguishing his new fund from the legacy portfolios currently facing pressures.
