The non-public credit score market was resilient in 2023, however “it’s prone to weaken within the close to time period,” based on Oaktree Capital Administration.
The funding large mentioned that efficiency final yr was supported by “strong US financial development” and actions taken by non-public fairness sponsors and lenders to assist weak debtors.
Nevertheless, it famous that firms at the moment are beginning to see the total influence of latest rate of interest hikes and warned that efficiency might deteriorate going ahead.
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“We anticipate an rising variety of firms to face liquidity challenges within the coming quarters, particularly debtors with unitranche floating-rate debt taken on earlier than 2022,” Oaktree mentioned in its quarterly market replace.
“Whereas most firms have been in a position to handle liquidity issues with short-term options, similar to tapping revolving credit score services, stress will doubtless mount within the coming months if rates of interest keep elevated. Moreover, non-public fairness sponsors might not inject capital into struggling firms to the identical extent that they did in 2023.”
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Central financial institution coverage might negatively influence the lending surroundings as central banks look set to maintain charges larger for longer than markets are presently anticipating, Oaktree added.
“This will likely discourage new offers and make it difficult for present debtors to roll over their debt, particularly extremely leveraged sponsor-backed firms,” the agency mentioned.
Regardless of the challenges, Oaktree famous that demand for personal debt financing seems to be rising and predicted that demand for refinancing is prone to develop considerably within the coming years as 40 per cent of the direct lending market is ready to mature in 2024 and 2025.
Learn extra: International non-public debt fundraising in 2023 barely down from 2022
It additionally highlighted alternatives for different lenders to realize share in new, specialised markets on account of weak point within the banking system.
“For instance, non-public credit score traders are more and more discovering enticing alternatives in all kinds of structured credit score transactions, together with these involving music royalties, life sciences royalties, tools finance, commerce factoring, lender finance, plane finance, transport finance, and rail automobiles – simply to call a couple of,” Oaktree mentioned.
“Loans via these intermediaries are sometimes producing returns on par with – or perhaps a little above – these seen in company direct lending, and, importantly, they usually function a broad, diversified, world asset base.”