Why Credit Standards Matter (Last of a Series)

One of the fundamental differences between investing in broadly syndicated and middle market loans is the nature of the due diligence associated with those asset classes.

The world of lending to large, liquid issuers is driven by public information. Investors use widely available ratings and price data on companies over $100 million in Ebitda to make decisions to buy or sell these loans based on these factors. Frequent issuers in the public capital markets are readily compared to other borrowers of similar credit standing.

Middle market lending, on the other hand, involves “tire-kicking.” Because these companies tend to be privately held in niche industries, lenders visit plants, meet management teams, run customer checks, and use third-party research to confirm value and competitive position. As mid-cap players say, you can’t do that on a Bloomberg.

One of our favorite stories of hands-on due diligence came from a middle market team visiting a manufacturer of HVAC equipment. Bankers spent the morning touring the plant, and then went next door to the company’s headquarters to meet the senior management team for lunch.

“What struck me,” the senior banker told us, “was the big white rug in the lobby of the executive suite. The plant was your typical grimy, sooty, production facility. And that white rug was pristine.” He laughed. “It was obvious