Demand for loans will be high
2022.12.22 08:20
Demand for loans will be high
Budrigannews.com – Over the past ten years, private credit has increased to a $1.3 trillion mountain. Ares Capital (ARCC.O) and Blackstone (BX.N) are leading the industry right now, and it faces a reckoning. The once-savior of debt-stricken buyout firms is not going anywhere; however, it will emerge significantly leaner.
Private credit firms continued to operate after banks stopped lending to private equity firms in 2022. According to Fitch Ratings, the market-sold high-yield loans issued by banks and sold to investors decreased by 80% in the first nine months of 2022.
However, Preqin data indicate that specialist private lenders had approximately $390 billion in spare capital to spend. Even though public debt markets were frozen in June, Blackstone led a group that raised $5 billion to fund the $10 billion acquisition of software company Zendesk.
Now, direct lenders are slowing down. Some have spent all of their dry powder on huge transactions like Zendesk. Borrowers face the risk of being unable to easily maintain typically floating-rate debt, which becomes more expensive as central banks raise rates, for a great deal more.
Lenders may have to extend debt maturities or accept IOUs instead of cash—known as payment in kind—in order to avoid borrowers defaulting. In the third quarter of 2022, these substitute interest payments increased from 6% of reported investment income to 12% for Owl Rock Capital (ORCC.N).
Investors who have financed private lenders might be surprised. The Cliffwater Direct Lending Index indicates that the sector performed admirably during previous crises, returning just shy of 16% even in 2010. However, that industry was smaller and more disciplined.
Lenders may delay writedowns in order to avoid enragement from investors and the buyout firms that supply them with deals, so it will take some time for the real value of today’s loan portfolios to emerge. The valuation of business development companies, which are publicly traded funds that invest in small businesses, provides one hint. They exchanged early December at a 12% markdown to their expressed net resource esteem, inferring misfortunes down the line.
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Funds are already offering less leverage at higher prices and with stricter covenants as reality sets in. Insurance companies and pension funds that provide investment fuel will not accept less. They will also favor lenders who are large enough to select the best borrowers or who have the expertise and resources to assist businesses through a slower economy.
According to Preqin data, the number of funds raised up until the beginning of December 2022 decreased by nearly 40% compared to 2021, but the average fund size increased by more than half. It suggests a smaller industry dominated by a few smaller businesses.
