Oaktree: Private credit “likely to weaken in near term”
The private credit market was resilient in 2023, but “it’s likely to weaken in the near term,” according to Oaktree Capital Management.
The investment giant said that performance last year was supported by “robust US economic growth” and actions taken by private equity sponsors and lenders to support vulnerable borrowers.
However, it noted that companies are now starting to see the full impact of recent interest rate hikes and warned that performance may deteriorate going forward.
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“We expect an increasing number of companies to face liquidity challenges in the coming quarters, especially borrowers with unitranche floating-rate debt taken on before 2022,” Oaktree said in its quarterly market update.
“While most companies have been able to manage liquidity problems with short-term solutions, such as tapping revolving credit facilities, pressure will likely mount in the coming months if interest rates stay elevated. Additionally, private equity sponsors may not inject capital into struggling companies to the same extent that they did in 2023.”
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Central bank policy could negatively impact the lending environment as central banks look set to keep rates higher for longer than markets are currently anticipating, Oaktree added.
“This may discourage new deals and make it challenging for current borrowers to roll over their debt, especially highly leveraged sponsor-backed companies,” the firm said.
Despite the challenges, Oaktree noted that demand for private debt financing appears to be increasing and predicted that demand for refinancing is likely to grow significantly in the coming years as 40 per cent of the direct lending market is set to mature in 2024 and 2025.
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It also highlighted opportunities for alternative lenders to gain share in new, specialised markets due to weakness in the banking system.
“For example, private credit investors are increasingly finding attractive opportunities in a wide variety of structured credit transactions, including those involving music royalties, life sciences royalties, equipment finance, trade factoring, lender finance, aircraft finance, shipping finance, and rail cars – just to name a few,” Oaktree said.
“Loans through these intermediaries are often generating returns on par with – or even a little above – those seen in corporate direct lending, and, importantly, they typically feature a broad, diversified, global asset base.”