“One of the key features of private debt is that we try to resolve the issue ourselves,” says Cecile Mayer-Levi at Tikehau Capital. “Ultimately we try to help companies and that’s why they like us. We can be flexible without a company incurring risk and having to go through formal processes. This is why I’m skeptical of anyone trying to maneuver like this.”

For its part, Pimco is hoping that some direct lenders will need a swift exit from souring loans because of pressure from their own creditors, including banks who’ve lent to them based on their portfolio’s overall value.

Sabrina Fox of Fox Legal Training, an expert on company loan documents, says top-tier private credit firms will have often allowed some wiggle room in lending terms as they competed for business, as they did during the previous leveraged-finance boom. That opens the door to Envision-type attacks. “There may be some protections around third party lenders,” she says. “But a lot of documents do allow for these lenders to move in.”

Interlopers also spy a chance to profit because private assets are usually valued at a fund managers’ discretion, and not constantly “marked to market” in the same way as publicly traded debt such as junk bonds and bank-provided leveraged loans. For Stracke, this means lending positions can fester if a fund manager isn’t getting outside cues, and loans can be mispriced.

“Mark to market can be a distraction,” he says. “But it can also be a healthy way of signaling potential disruptions and enabling the market to function.”

This article was provided by Bloomberg News.

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