Private Credit: The Unsung Hero for Stressed Companies in Emerging Markets

In the high-stakes world of emerging markets, where fortunes can change overnight, businesses may find themselves teetering on the edge of financial disaster. But for fundamentally sound companies facing temporary stress, a savior is stepping into the spotlight – private credit, often an unsung hero acting as a financial first responder. Private credit can offer a viable solution to bridge the gap and provide the necessary support to prevent a downward spiral, thereby saving a company and preventing it from becoming distressed.

Stressed, Not Distressed: A Critical Distinction

Let's be open: In emerging markets, every business hits a rough patch now and then. But it's crucial to distinguish between "stressed" companies – those facing temporary challenges – and "distressed" companies, which are in deeper financial trouble.

• Stressed companies are those experiencing temporary financial difficulties. These challenges may stem from liquidity issues, market fluctuations, operational setbacks, or even unique factors in emerging markets like currency fluctuations, political instability, or supply chain disruptions. However, these companies often have strong fundamentals, a viable business model, and the potential to recover and return to stability with the right support.
• Distressed companies, on the other hand, are in a more severe state of financial trouble. They may be facing insolvency, severe cash flow problems, or an inability to meet their debt obligations. Recovery for distressed companies is far more complex and requires extensive restructuring.

If your business has solid fundamentals but needs a quick infusion of capital to weather the storm, private credit could be the answer.

Turning the Tide: How Private Credit Can Help Companies Bounce Back

Private credit offers a unique combination of speed, flexibility, risk tolerance, strategic partnership, and localized expertise, providing a tailored lifeline when traditional financing falls short:

• Speed and Flexibility: Private credit players can offer faster access to capital compared to traditional capital providers such as banks, private equity, and development finance institutions. This speed is crucial for stressed companies that need immediate funds to address liquidity issues or capitalize on urgent opportunities. Additionally, private credit solutions are often more flexible, with terms tailored to the specific needs of the company.
• Risk Appetite: Private credit players are generally more comfortable with the inherent risks of emerging markets. They understand the unique challenges faced by businesses in these regions and are often willing to take on higher risk for potentially higher returns.
• Strategic Partnership: Beyond capital infusion, private credit providers can become a valuable strategic partner. Their involvement often translates to improved operational efficiency, optimized capital structure, and effective implementation of turnaround strategies, accelerating a company's path to recovery.
• Preserving Equity: For business owners and shareholders, preserving equity is naturally a key concern. Private credit allows companies to secure the needed funds without diluting ownership, which is particularly important for founders and existing investors who believe in the long-term potential of the business.
• Localized Expertise: Private credit teams in emerging markets possess deep local knowledge, understanding the intricacies of regulations, cultural nuances, and economic trends. This expertise enables them to craft tailored financial solutions and offer invaluable strategic guidance to stressed companies navigating complex local environments.

Private Credit in Action: Success Stories from Emerging Markets

The saga of private credit rescuing stressed companies isn't just a legend – it's a reality unfolding recently. Here are three examples from emerging markets:

• Cinepolis (Mexico, 2021): This major cinema chain across Latin America secured a private credit facility worth around $270 million to manage debt obligations during pandemic-induced closures. This financing was critical for reopening theaters and investing in digital platforms as restrictions eased.
• Cell C (South Africa, 2020): A South African mobile network operator, Cell C secured a $544 million private credit deal, vital for restructuring its debt and providing essential liquidity. The financing allowed Cell C to stabilize operations, invest in network improvements, and avoid potential bankruptcy.
• Avianca Holdings (Colombia, 2020): Latin America's second-largest airline faced a severe crisis due to the pandemic's impact on travel and filed for bankruptcy protection. However, a $2 billion private credit financing deal was instrumental in restructuring its debt, allowing it to emerge from bankruptcy in 2021 and continue operations.

While not exhaustive, these illustrative examples demonstrate the significant impact of private credit in rescuing fundamentally sound companies facing diverse financial challenges in developing markets, providing tailored solutions unavailable through traditional financing.

Beyond the Horizon: The Expanding Role of Private Credit

Private credit is rapidly emerging as a crucial tool for stressed companies in developing markets. Its ability to offer quick, flexible, and tailored financial solutions can mean the difference between recovery and distress. As more companies recognize the value of this unsung hero and first responder, private credit will continue to play a pivotal role in supporting business resilience and growth in challenging environments.

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