Private Debt News Weekly Issue #25: Partnerships, Defaults, and Market Shifts
Private Debt News Weekly Issue #25: Partnerships, Defaults, and Market Shifts
From Bank Collaborations to Default Risks: What Institutional Investors Need to Know
Introduction
The private credit landscape is shifting beneath our feet. This week, we’ve seen titans of finance forge unexpected alliances, while whispers of default risks grow louder in the corridors of power. As interest rates pivot and geographic boundaries blur, the $1.7 trillion private credit market finds itself at a crossroads.
From Wall Street to the bustling financial hubs of Asia, players big and small are recalibrating their strategies. Join us as we unpack the deals, dissect the data, and explore the trends that are reshaping the world of private lending. Whether you’re a seasoned market veteran or a curious observer, this week’s developments offer a fascinating glimpse into the future of finance.
Banks and Private Credit: A New Era of Collaboration
Citigroup and Apollo Global Management have agreed to a $25 billion private credit partnership, spanning five years
Focuses on non-investment grade transactions in North America
Involves Mubadala Investment Co. and Apollo's insurance unit, Athene
Citigroup's head of debt capital markets, Richard Zogheb, states: "We can't be an ostrich and stick our head in the sand and pretend it doesn't exist."
Apollo Co-President Jim Zelter describes it as "where the industry is going"
Citigroup will earn fees for originating transactions, while Apollo and partners provide the capital
BlackRock is overhauling its private credit business, establishing a new Global Direct Lending division under Stephan Caron
BlackRock manages about $35 billion in direct lending assets, a fraction of its $10.6 trillion total AUM
Aims to double its annual revenue from private assets to about $2 billion by 2028
CEO Larry Fink identifies private credit as a "primary growth" driver
BlackRock's head of macro credit research predicts the global private debt market will double to $3.5 trillion by 2028
Blue Owl Capital led a $3.2 billion private debt financing for Blackstone and Vista Equity Partners' buyout of Smartsheet Inc.
Involved 20 other lenders, signaling high demand for large deals
Included a $2.9 billion annual recurring revenue loan and a $300 million revolver
Priced at 6.5 percentage points over the Secured Overnight Financing Rate
Default Rates: A Looming Concern?
Fitch Ratings reports a private credit default rate of 5% in August
Analysis based on nearly 1,200 firms
39 defaults from January through August, with 18 in the first quarter
Health care and technology companies were primary drivers of defaults
Majority of defaults involved payment-in-kind arrangements, indicating cash flow issues
Kroll Bond Rating Agency estimates a lower default rate of 1.5% in direct lending for the first half of the year
Based on 13 defaults out of 846 firms analyzed
Notes that many companies have secured loan extensions, potentially masking underlying issues
Jae Yoon, CIO of New York Life Investment Management, warns of a potential "reckoning moment" in private credit
Draws parallels to the 2008 financial crisis
Points to declining recovery rates, excessive competition, and loosening covenants as key risk factors
Matthieu Boulanger of HPS Investment Partners notes "illiquidity premium" has shrunk from 350 basis points to 100-150 basis points
Prospect Capital Corp., an $8 billion publicly-traded private credit fund, faces potential downgrades
Moody's revised outlook to negative
16% of Prospect's total income was from payment-in-kind as of June 30, up from 10% the previous year
Moody's cites this as "one of the highest levels among peers"
Market Trends and Investor Behavior
Federal Reserve's recent interest rate cut expected to impact private credit market:
Michael Zawadzki (Blackstone) predicts increased M&A activity as cost of capital decreases
Could drive more opportunities for direct lending, especially in transaction-driven deals
Global M&A transactions fell to $3 trillion in 2023 from a peak of $4.7 trillion in 2021 (PitchBook Data)
Bruce Richards, CEO of Marathon Asset Management, advises investors to "buy all credit" post-rate cuts
Cites strong economic indicators, including 3% annualized GDP growth in Q2
Predicts "prolific" activity in direct lending due to cheaper financing
Intermediate Capital Group (ICG) closed a €15.2 billion ($16.8 billion) European direct-lending fund
Largest of its kind ever in the region
Follows Ares Management Corp.'s record $34 billion US direct lending fund closed in July
ICG also secured $1.9 billion for its North America-focused private debt strategy
North American Credit Partners Fund III is 50% larger than its predecessor
Targets companies with EBITDA ranging from $25m to $250m
Geographic Expansion and New Opportunities
Private credit firms looking to expand geographically:
PGIM's CEO, David Hunt, identifies Australia and Indonesia as promising growth markets
Opportunities arise where traditional banks are retreating from funding markets
Hunt describes private credit as PGIM's "fastest growing business"
Blackstone leads a $2 billion private credit deal for The Fidelis Partnership, a Bermuda-based insurance underwriter
Other lenders include Oak Hill Advisors, Barings, PNC, and Barclays
Demonstrates growing interest in insurance-linked private credit opportunities
Geographic expansion offers:
New avenues for growth and diversification
Introduces new risks and challenges in unfamiliar regulatory environments and market dynamics
Conclusion
The private credit market is at a crossroads, with major financial institutions embracing the asset class while concerns about default rates and market saturation grow. For institutional investors, navigating this landscape requires a nuanced understanding of evolving market dynamics, from large-scale partnerships to regional expansion opportunities and potential default risks.
Key areas to watch include:
Performance and evolution of bank-private credit partnerships
Trends in default rates and recovery values, particularly in sectors like healthcare and technology
Impact of interest rate changes on deal flow and credit quality
Geographic expansion and its effects on risk and return profiles
The growing role of private credit in large-scale M&A and buyout activities
In this complex and rapidly changing environment, thorough due diligence and a clear understanding of risk tolerance will be more important than ever for institutional investors in the private credit space.