Leveraged Lending Is ‘Grossly Out of Control,’ Arena CEO Says

(Bloomberg) -- Daniel Zwirn, CEO of Arena Investors, sees leveraged lending and middle-market corporate private credit as “grossly out of control.”

Zwirn, who oversees the firm’s $1.1 billion in assets under management, spoke with Kelsey Butler on Oct. 30. Comments have been edited and condensed.

Where do you see opportunities now?

In domestic corporate stuff, we will look at lightly sponsored or non-sponsored transactions that perhaps have cash flow numbers below what a regular private lender might consider. We are also actively involved in oil and gas related lending. There is really a big sea change going on in oil and gas through a combination of factors including fracking. You also have banks wholly redlining the space, constricting capital. So all of that leads to favorable pricing and structure dynamics for firms like us who are doing these transactions while hedging out exposure to commodity pricing.

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We’re also doing special situation real estate loans and we’re very interested in doing things around the coming implosion in subprime auto. And in the tradeable world, we’re starting to see things like leveraged loans trading at levels that start to make them worth looking at, for the first time in a long time.

What are the most concerning parts of the credit market?

It’s super hard to predict when markets will start to explode and how it’ll start. But certainly, leveraged lending and the associated middle-market corporate private credit markets have been grossly out of control, in partnership with private equity. So the equity pays 11 times because they can get their returns since they’re borrowing 7 or 8 times and lenders are saying it’s going to be OK because there’s someone with 3 or 4 turns below me. And each of them is wrong. And that is going to end badly.

I think the CLO craze is what I just said on steroids – because you’re doing that and then you’re 19 times levered. And so it is possible that recoveries on those things might not be as bad as we might think, but along the way it’ll be rough.

How do you find deals?

In addition to our broad mandate, we have 40 joint ventures with several hundred people spending all of their time looking for things just for us. And typically there’s some wrinkle that precludes conventional sources of finance from showing up -- tough person, esoteric situation, timing constraints, unique combinations of assets. So we and the counterparty understand that we’re not really taking on a whole lot of risk and we’re getting overpaid relative to the market because of these exogenous factors. And when you have as many people looking for stuff as we do, without a huge pressure to deploy, we are very dispassionately picky. And if you don’t like it, no problem, there’s always another bus coming.

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Dan Wilchins, Nikolaj Gammeltoft

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