Even as traditional fixed income offers more attractive rates, institutional investors continue to explore alternative credit.
Nuveen’s 2023 EQuilibrium survey of global institutional investors found that nearly half of the 800 respondents were revisiting their traditional fixed income allocations as they expand their reach for yield. But exploring opportunities in mainstream bonds was not the only approach being pursued. Investing in alternative credit was selected as the next most popular course of action, with private credit identified as one of the top asset classes being pursued.
Randy Schwimmer, Co-head of Senior Lending at Churchill, a Nuveen company, answers five questions about the current market environment for private credit, the opportunities and how to manage the risks.
Q: How are higher rates affecting private credit?
With the Fed having hiked rates by over 500 basis points in a little over a year, leveraged loan issuers are clearly being pressured by tighter borrowing costs. In turn, private equity owners are challenged to maintain their fund returns. Nevertheless we are in the most attractive direct lending environment we’ve seen in recent history.
Lower debt capacity means sponsors must invest more cash equity as a percent of total capital resulting in a larger cushion for lenders. Debt multiples are also down by a full turn of EBITDA. At the same time the benchmark rate jumped, loan spreads have widened, which has produced the best spread per unit of leverage metric in memory. Add to all this tighter and more numerous financial covenants and you have a very investor-friendly environment.
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