"Private credit, public squalor"

 

Check out this Substack article in "The Social Factor" by Tom Powdrill regarding the attempt by the owners of a food manufacturing company in Wrexham, North Wales to cut the terms and conditions of its workers by "fire and rehire". 

I have contacted Newham Council Pension Officers and the London Collective Investment Vehicle (LCIV} about this. By coincidence I was brought up near Wrexham and have some experience of the impact of "fire and rehire". Thankfully the new Government is consulting on how to effectively "ban" such dismissals in the future. Hat tip picture to Herald, Wales

Private credit's link to fire and rehire in Wrexham may open up more questions

Ryan Reynolds has made Wrexham AFC internationally famous. His co-ownership of the club, and the Welcome To Wrexham TV series, have made the club visible to millions of people. But there’s another increasingly high-profile drama, involving a change in ownership, playing out in Wrexham - the takeover of food producer Oscar Mayer by private credit manager Pemberton Asset Management.

Oscar Mayer operates several sites including one in Wrexham. Pemberton became an 85% owner of the business in 2023, having previously been a lender. In 2024 Oscar Mayer has proposed reduced terms and conditions in new contracts under threat of dismissal, known as ‘fire and rehire’.

The workforce is fighting the changes and 550 workers have been on strike. They recently voted 97% in favour of continuing strike action. These are not well-paid workers, so the proposed cuts are going to hurt. Not surprisingly, the dispute is a big deal in Wrexham.

Wrexham is linked to the dispute in another way. Clwyd Pension Fund, which includes Wrexham council workers, invests in a private credit fund via the Wales Pensions Partnership (WPP), the local LGPS pool. That fund, run by Russell Investments, in turn allocates money to underlying managers including Pemberton.

Understandably, there is a reluctance on the part of councillors representing wards in Wrexham to award money to an asset manager that owns a company that is cutting the pay of workers in Wrexham under threat of getting the sack. Private credit is a popular asset class and there are plenty of other managers available. Clwyd has confirmed it won’t be giving Pemberton any more money and will engage with WPP over the issue.

Oscar Mayer may be an indicator of future flashpoints. As noted, private credit is a hot asset class. Every asset manager now seems to want a piece of the pie and in turn lots of pension funds have made allocations to Pemberton and other managers. Because of the type of companies they lend to, it shouldn’t be surprising that some struggle financially. Nor should it be a surprise that the floating rate nature of the loans that are prevalent in private credit can push up borrowing costs quickly.

The IMF’s Global Financial Stability Report notes “The transmission of higher rates into firms’ cost of debt has been more swift for firms with variable rate debt” and “Private credit borrowers almost exclusively use floating rate loans. By contrast, only about 29 percent of high-yield corporate bond issuers’ total debt is variable rate.”

It’s possible that we’ll see more cases like Oscar Mayer where the lender ends up becoming an owner. Some managers combine both PE and private credit under one roof but others like Pemberton focus on lending. Without a PE background such managers probably have don’t have expertise in owning/running an investee business and so in a crunch may reach for How To Cut Costs For Dummies without thinking through the reaction from the workforce.

Simply repeating “this business is in difficulty, these changes are unpleasant but necessary” and not budging is recipe for a prolonged dispute. Anyone with a basic understanding of industrial relations - which some private credit managers may simply not have - knows this is where you start from, not end. Other private credit managers might think of Oscar Mayer as an example of how not to do it.

In turn, pension funds and other asset owners may find themselves caught up in similar disputes, since the circumstances that result in a lender becoming an owner are unlikely to be brilliant. And as the Clwyd example shows, there is a risk of a problem showing up on the fund’s doorstep.

For asset managers and asset owners I can see this asset class has the potential to chew up carefully curated ESG / Responsible Investment credentials without a much clearer sense of how they will handle workforce issues when, inevitably, a portfolio company ends up in trouble".