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Digital Subscriptions > The Hedge Fund Journal > Issue 134 – Aug 2018 > MGG: Can Alternative Credit be a Safe Haven?

MGG: Can Alternative Credit be a Safe Haven?

HAMLIN LOVELL

Championing creditor interests

PROFILE

Since MGG Investment Group (MGG) was founded in 2014, credit investors have been concerned about rising leverage and declining creditor protections in the corporate credit markets. Both metrics have reached extreme levels in 2018, argues MGG President and Co-Founder, Greg Racz.

“Leverage has now surpassed 2007 peaks on some measures, with roughly 20% of mid-market US LBOs now levered above seven times EBITDA. This is a gargantuan number that will be very hard for a business to cope with when inevitably this current expansion ends,” says Racz.

In a recession, the seven times could suddenly be eight or nine times or even more – and it may already be, when more conservative or simply conventional headline measures of EBITDA are used. Some 35% of US middle market deals have EBIDTA adjustments, according to Covenant Review. They are not based on last year’s real and actual EBITDA, but rather on both backward-looking and forward-looking adjustments. EBITDA figures may add back exceptional losses or non-recurring costs or both for “Normalised” EBITDA. Forecast EBITDA measures such as Run-rate EBITDA, or Pro-forma EBITDA, might reflect anticipated future revenues, cost savings, or potential merger synergies that may or may not be realised. In many deals, there is no cap on the quantum of adjustments, which can sometimes more than double the EBITDA figure. Professional investor groups such as CFA Institute have flagged how the growing use of non-GAAP financial measures, which nearly always increase reported profitability, make it more difficult to compare and reconcile financial statements. Ratings agency Moody’s classifies many of the adjustments as “aggressive”, based partly on historical analysis suggesting that cost savings are not always achieved.

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