Next Year Will Be Tough for Credit Markets, With One Major Exception
(Bloomberg) -- The next few years promise to be volatile for credit markets as interest rates start to rise, but there’s one asset class set to continue thriving.
Private credit’s assets under management could surge about 70% to $1.5 trillion over four years, according to Paul Gulberg, senior industry analyst at Bloomberg Intelligence. Private equity managers such as Apollo Global Management Inc., Ares Management Corp. and Blackstone Inc. stand to benefit, he wrote in a note.
This opaque corner of the credit world sits at one remove from the day-to-day movements of the markets. The sector typically deploys floating-rate structures, protecting it from changes to monetary policy. And with the capital invested locked up for the duration of any deal, it’s also untroubled by outflows -- a major difference between private credit and syndicated loans.
“Direct lending is patient capital, not susceptible to significant swings or outflows if there is broader market volatility,” said Armen Panossian, Oaktree Capital Management’s head of performing credit and portfolio manager.
These features will come in handy as the prospect of interest-rate hikes, reduced monetary stimulus, high inflation, more coronavirus variants and continued supply-chain pressures threaten to ramp up volatility into next year and beyond. Rate hikes would need to be very sharp and swift for them to trouble private credit firms. And at that point it would be a problem for just about everyone as borrowers would struggle to service their debts.
Andrew McCullagh, a managing director at Hayfin Capital Management, says there may be a sweet spot for private credit: a short-term, modest public debt-market disruption caused by an unexpected shift in monetary policy.
“That would create opportunities for direct lending funds like ours,” he said. Hayfin could buy in secondary and acquire hung syndications in the event the market shuts and banks struggle to sell on their underwritten securities, he added.
For those focused only on primary deals, such a disruption will dry up the M&A pipeline, meaning they may miss out on interesting opportunities, he noted.
Direct loans hit 549 deals in Europe in the first nine months of the year alone, overtaking the record for all of 2019, according to a report by Deloitte. Expectations of greater volatility in the coming year may only boost demand for these type of securities.
Recent deals include the $1.52 billion unitranche obtained by Parts Town, a portfolio company of Berkshire Partners and Leonard Green & Partners LP, to refinance, support a minority equity investment from Leonard Green and back an acquisition, and the 1.5 billion-pound ($2 billion) unitranche raised by wealth management platform FNZ. One of the biggest deals in this space took place in August, when three lenders provided a $2.6 billion unitranche loan to help fund Thoma Bravo’s buyout of Stamps.com.
The growth of private credit hasn’t come without its own risks. The higher number of players as well as capital to deploy has meant more deals have seen funds giving up key safeguards that protect them if things go awry in order to win lending business.
Pointing to stock-market pullbacks spurred by the rising yield on 10-year U.S. Treasuries, Oaktree’s Panossian says long-term rates affect valuation multiples for companies, which may offer owners fewer incentives to sell a business. While that may mean direct lenders in a capital structure are stuck in a position for longer than expected, it also brings opportunities, he says.
Elsewhere in credit markets:
The European Central Bank will decide on Thursday to stop net purchases under their 1.85 trillion-euro ($2.1 trillion) pandemic plan in March, according to economists polled by Bloomberg, with a temporary boost to the pace of its regular program expected to soften the impact of higher inflation.
- BayernLB is offering a sterling covered bond on Friday, as the market stays open two weeks longer than in 2020
- Dunelm Group signed a 185 million-pound sustainability-linked bank facility, with targets including cuts in greenhouse gas emissions and plastic packaging
The debt restructuring of flag carrier PT Garuda Indonesia is forcing creditors to weigh short-term losses against the potential for gains further down the line in one of the fastest growing aviation markets in Asia.
- China’s top institutions are stepping up efforts to manage the international message on China Evergrande Group’s collapse -- even if the developer itself is staying silent about its default status
- Malaysia’s energy firm Serba Dinamik Holdings Bhd. has defaulted on its $222 million Islamic bond, after failing to make coupon payments, says S&P Global Ratings
SoftBank Group Corp. has offloaded $550 million of debt it provided to WeWork Inc. last year after selling a 9.75% bond to investors.
- The U.S. House approved legislation to switch the most troublesome contracts, including mortgages, business and student loans, to a replacement benchmark in an effort to prevent a flood of litigation when dollar Libor expires
- U.S. District Judge Colleen McMahon expects to render a ruling on Purdue Pharma LP’s opioid settlement next week
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