There is no shortage of private credit opportunities
Fixed income securities are fundamental to long-term investors, and as such, the lingering sovereign debt scenario and Covid-related effects on investable companies fuel a voracious and growing appetite of institutional investors for opportunities on the market. credit markets.
To explore such opportunities, II recently spoke with Tyler Lindblad, Senior Managing Director, Credit Manager, Antares Capital. Lindblad was one of the founders of Antares 25 years ago and has extensive experience in successfully selecting and underwriting credits on various cycles. In short, Lindblad believes there are significant opportunities available and many opportunities to be very selective.
What’s your outlook on the credit market right now?
Tyler Lindblad: We are seeing very robust transaction activity, especially at the end of the Covid period when activity has been reduced. We’ve seen private equity sponsors raise significant capital, and they’re now looking to deploy that capital – and that also creates significant opportunities for business and private credit to deploy capital. We see a lot of high quality opportunities. From a senior debt perspective, we see multiples rising modestly and purchase prices rising. As a result, the amount of equity that sponsors invest in businesses has increased dramatically. When it comes to yields, there has been an increase in prices as a result of the pandemic. The terms were friendly from the lender’s point of view – but that has certainly changed.
Do you see some price suppression?
Lindblad: We are, albeit at a more normalized level – almost at 2019 levels. Where we have really seen a price cut is in the larger BSL [broadly syndicated loan] market, and the second lien market – which in turn has had some impact on the unitranches market. But even unitranche spreads remain higher than they were in 2019.
When you consider the improving economy and the high-quality companies that have entered the market, as well as the sponsors who are investing large equity capital and attractive prices, we think this is a good time to seriously consider private credit opportunities.
Everyone is talking about inflation. What do you think of the performance of borrowers in an environment of rising interest rates and the burden of debt service? Maybe a little inflation isn’t a bad thing?
Lindblad: I agree that a little inflation is not necessarily a bad thing, especially if you are a debt provider. If you provide corporate debt, a little moderate inflation is better than deflation. We really don’t want to see high inflation, but low inflation isn’t all bad. We are currently seeing some inflationary impact, and this reflects a US economy that has taken off significantly when it reopens. Consumers have started spending again, boosting the economy.
One gets the impression that there may be a “but” to come. . .
Lindblad: Quite true! From a credit perspective, we look at the pressure on raw materials in some industries, the pressure on the workforce in others, and the availability of talent in a competitive hiring environment. Labor costs are increasing. We always have an eye on the supply chain and product availability, and we are focused on lending money to companies that are market leaders and have pricing power because of their relationships and of the added value they offer to customers. Yes, they are under pressure, but they in turn can pass those costs on to their customers.
In the midst of everything we’ve been talking about, how do you balance deployment and selectivity while maintaining creditor protections?
Lindblad: The credit selection is always key and essential to the success of our business. We manage this by having large and deep sponsor relationships which generate a significant flow of transactions from us. When you generate a large flow of transactions, you can choose the best credits and be very selective. Right now, for example, our focus is on companies with business models focused on recurring revenue. In other words, where consumer products or services are consumed on a regular basis.
What does this mean in the context of Covid?
Lindblad: We are very keen on lending money to businesses and industries that have favorable demand drivers and growth potential. Sponsors will support high quality businesses during short term disruptions. We are also seeing that the terms and conditions are starting to become more flexible to the benefit of the borrower.
We have just come through a period where private credit took a serious stress test and came out brilliantly on the other side. But concerns about the risks persist. Nevertheless, you believe that the conditions are favorable for the deployment of capital. Can you put this point of view in context?
Lindblad: Private credit has undergone a significant stress test when it comes to Covid. High-quality borrowers have shown great resilience – they have bounced back. Some of these companies needed help and sponsors were there to inject additional capital to support them and provide them with liquidity. Roll the clock forward until today and the Delta variant begins to gain momentum. That said, the US economy is still open. And when we look at our portfolio, it continues to improve. Default rates are close to historic lows in our portfolio.
What did this mean for the performance?
Lindblad: Even compared to pre-Covid 2019, the portfolio has performed well, highlighting the fact that the US economy is in a robust position. As you mentioned, there are always concerns about the risk, whether it’s the Delta variant or something else. Having said that, we believe the US economy is on solid footing for the foreseeable future. When you think of private credit with variable rate debt, even if interest rates go up, our rates will go up with it – that’s a nice hedge. And at the end of the day, the sponsors raised some big bucks. They put more and more fairness in the transactions. We see them buying better quality companies. And with our portfolio – which has been well vetted – they make additional acquisitions at a lower price that helps them create value and allows us as a lender to deploy additional capital in high quality companies that have been checked.
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