Moody’s: Private credit returns could fall this year
Moody’s Investors Services has warned that private credit returns could fall this year due to increased competition in the space.
A new report has suggested that the “golden era” of private credit returns could be over, as more players compete for the best deals and risk increases.
Moody’s has predicted that alternative managers will start to build out their own origination capabilities, which will increase their market share but may also intensify risks in private markets.
In the report – titled ‘Escalating private credit competition will increase risk and scrutiny’ – Moody’s also predicted further growth in private lending to corporates in Europe.
“As rate hikes level and competition escalates, this will put pressure on private credit returns, including the generous illiquidity premiums that direct lenders wield over syndicated lenders in public markets,” said Christina Padgett, head of private credit research at Moody’s Investor Services and one of the authors of the report.
Read more: When it rains, it pours: Liquidity special report
“All of this will drive greater convergence in terms and pricing between banks and nonbanks.”
Padgett added that she expects leveraged buyouts to gain more traction as private credit lenders put a pile of dry powder to work in the markets to take advantage of cheaper borrowing costs.
Read more: Blackstone to buy $1.1bn credit card debt from Barclays
Moody’s also said that companies are seeking to save money on interest costs by refinancing older loans.
Many companies can save 200 to 300 basis points when opting for public debt over a direct loan, Moody’s found. According to PitchBook data, 21 companies have issued a broadly syndicated loan to refinance $8.3bn (£6.41bn) of debt that was previously provided by direct lenders during the year to date.
Moody’s also expects to see more regulation in the space, as the private credit market expands and attracts more attention. Tighter regulation could push costs higher resulting in lower investor returns.
Read more: Private debt AUM passed $1.6trn last year amid “explosive” growth
