such unique trades into a triple or quadruple digit IRR however since the same deals cannot be sequentially repeated ten times a year.)


Yield pickups Yield pickups on private deals can be measured in various ways, including spread per turn of leverage, but Sona applies a variety of metrics rather than any single measure. In absolute terms Sona is seeing some borrowers pay as much as 800 basis points in excess of the yield on their legacy public debt, though the spread over any contemporaneous public issue might be smaller given spread widening this year.


There are debates over whether return premiums in private debt should be viewed as one or more of illiquidity, complexity, structuring or sourcing premia and Sona prefers the term “ability premium”. Aylward questions whether much of an illiquidity premium exists in plain vanilla mid-market direct lending, which could be an overcrowded area. “Illiquid bilateral deals alone are insufficient for a substantial yield pickup, but higher returns can come from non-vanilla deals,” he points out. “Larger premiums could come from complexity, unusual instruments, bespoke deals, subordinated bonds where most of the debt is senior and secured, or ticket sizes below benchmark size that are too small for public bond issues which average EUR 375 million in size.”


Eclectic mandate These examples should not be used to make useful generalisations about the strategy, which has a very flexible mandate. It is not an SME (smaller and medium sized enterprises) lending strategy per se, since borrowers are often multi-billion companies. And Sona is very selective about taking junior risk: most of the deals – 70% to 80% – are senior or senior secured. Some deals can be rather exotic, esoteric or complex, but equally there is some more traditional leveraged finance that involves private equity sponsors. The overall mandate is broad in that it might involve asset-backed or cash- flow based lending or combinations of the two, including some more bespoke creative solutions. The industry split is broadly diversified so long as there are assets and cashflows, but Sona prefers to avoid more “binary” industries such as venture technology, unproven technology or biotechnology. “In credit the most you get back is usually par, so we want to be diversified with strong downside protection. Such firms are more naturally shorts in my experience,” says Aylward.


There are three verticals: financing solutions, liquidity or rescue financing, and event-driven deals. Financing solutions usually revolve around acquisition finance and can involve a variety of sponsors. Senior convertible or equity linked debt could offer high single to low double-digit yields, with equity upside at low premiums. The underlying companies can be public or private and are mainly


pre-IPO if private. These deals can produce very attractive IRRs: “It is sometimes possible to structure deals with a low loan to value ratio and equity upside,” says Aylward.


Liquidity or rescue financing will replace existing lenders at the top of the capital structure often in complex situations: “During Covid we financed a tourism asset in Ireland, earning 11% for a 50% loan to value ratio in a complex structure that involved property collateral, concessions, cashflow sweeps and security documents,” explains Aylward.


Event-driven deals require fundamental value and catalysts, and often involve making a judgment call on recent dislocations. Here Sona is looking to actively drive processes and engage with stakeholders but is not in the business of public activism or replacing boards.


Some deals will perch astride all three verticals: “Secondary loans could be acquired at discounts, then new financing may be done, and there could be event catalysts based on relationships with the sponsor,” says Aylward.


Portfolio allocations amongst the three verticals are somewhat opportunistic but not completely unfettered because a balance between the three deal types is seen as desirable for portfolio diversification and the return profile. In May 2022 Alyward envisaged a higher weighting in event driven because he saw such compelling deal-flow, and because the situations are often shorter term so that the capital can be redeployed elsewhere. Over time long term financing solutions could become the largest.


Legal structures and adverse scenarios Legal structuring and choice of jurisdictions can be important. “English law is the most commonly used, as we find it the most creditor friendly, but we have also used other local jurisdictions and been involved in multi-jurisdictional deals. There have also been fluid situations where vehicles moved between jurisdictions,” says Aylward.


The strategy is not a distressed debt approach, but it will sometimes encounter stress and distress. Sona is prepared to exercise creditor rights when they need to, and have gone through restructurings and workouts, but they are not an adversarial lender and have a partnership ethos rather than a loan to own mentality. “We try to avoid workouts and do not want to wait years to monetise value. Monetisation and security are top of mind. Restructurings could involve capital optimized tenders, runways, or asset sales,” says Aylward.


As credit markets adapt to a new geopolitical, economic and financial market climate, Sona is confident about the runway of opportunity for its strategies. THFJ


13


“Some zombie companies may struggle to refinance, and others may not be able to cope with energy costs after their hedges roll


off.” — JOHN AYLWARD


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