Today's Credit Markets
- Market Volatility on the Rise
- Overall Weakening Credit Metrics
- Liquidity Currently Ample and Cheap
- Interest Rates Continue to Increase
- Spreads Have Compressed
Market Volatility on the Rise
2018 saw an increase in market volatility, driven by the growing possibility of trade wars, uncertain and opaque U.S. government / public policies, increasing interest rate & inflation, and European political instability.
Weakening Credit Metrics
Covenant lite (“cov-lite”) loans are loans that are typically issued with fewer restrictions on the borrow and fewer protections for the lender. Cov-lite loans continue to dominate the U.S. leveraged loan market (currently representing more than ~85% of all institutional loans are cov-lite).
Corporate leverage has increased to higher than pre-crisis levels, along with debt to EBITDA levels increasing a full turn (4.0x to 5.2x) from 2009.1 As a result, cov-lite underwriting and overall weakening credit metrics could limit recoveries when cycle shifts.
Liquidity Currently Ample and Cheap
Liquidity is currently near all-time highs as more investors have rushed into leverage lending markets in the search for yield, which has caused increased issuance and tightening yields.
Ample and cheap liquidity has allowed many weak entities to refinance.
Borrower friendly credit-agreements and refinancings could potentially prolong the survival of distressed companies, delaying defaults.
This is reflected by the current low default rate during times of heightened corporate debt; potential for defaults will increase when cycle turns as these companies become vulnerable.
Interest Rates Continue to Increase
“Over the past year the economy has been growing, the unemployment rate has been near record lows…it is likely that the economy will grow in a way that will call for two interest rate increases next year.” - Federal Reserve (Fed) Chairman Jerome Powell
(December 19th, 2018)
The Fed lifted its benchmark rate in December for the 9th time, to a range of 2.25% to 2.50%.
Spreads Have Compressed
In recent years, spreads have compressed across U.S. Middle Market Lending and virtually all fixed income markets, continuing a long trend. The risk free-rate however, as noted above continues to increase.
What Does This Mean?
We believe key drivers in determining the success of a credit investment portfolio are thoughtful opportunistic investment strategies and differentiated credit selection capabilities
In our view, it’s imperative to invest with a Manager that has:
- Invested Through Past Cycles
- Differentiated Credit Selection Capabilities
- Offers Opportunistic Investment Strategies
- Global Platform
- Flexibility to Change Investment Approach Based on Market Dynamic
How OFI Carlyle Private Credit Fund Seeks to Take Advantage?
Secondary purchases of mispriced, stressed liquid credits in periods of market volatility or dislocation. May include loans, bonds, Collateralized Loan Obligations (CLOs) tranches and other liquid credit instruments
Distressed Non-Control Opportunities:
Opportunistic secondary purchases of distressed non-control debt investments at a deep discount to intrinsic value where there is a low likelihood of gaining a control position. May include failed bank syndications where credit securities can be purchased at discounts to intrinsic value due to technical issues
Provider of credit financing to borrowers undergoing some type of idiosyncratic distress and/or dislocation. May include situations involving over-levered balance sheets, closed capital markets or company-specific issues
Key Takeaways – We Believe
- Volatility Creates Opportunity
- Manager Selection is Incredibly Important
- Carlyle Credit is Well Positioned in All Cycles