An impending Donald Trump presidency and Republican-controlled Congress left many private debt insiders questioning whether the new regime in the US may scrap the regulations that resulted in banks’ retrenchment from mid-market lending and the rise of alternative lenders.
But Ken Kencel, president and chief executive officer at New York-based Churchill Asset Management, does not believe a bank comeback in the mid-market space will happen under the new government, he told Private Debt Investor.
“There’s been speculation that a looser regulatory rein will encourage banks to get back into leveraged lending, where non-bank lenders have taken such a dominant foothold,” said Kencel. “We do not expect that to be the case.”
It’s difficult to handicap whether the new government repeals the Dodd-Frank Act and its statutes or restores the Glass-Steagall Act.
But Kencel’s firm does not expect to see “capital requirements or other important structural limitations change in the mid-market space, and that bodes well for us”.
Kencel’s colleague, Randy Schwimmer, who oversees origination and capital markets for the firm, explained such regulations were a boon to alternative lenders, noting that 2016 saw an influx of capital.
“As bank regulation has taken hold, the non-bank world has had an opportunity to step up,” he said. “The amount of capital coming into private credit has certainly continued this year.”
Rather than rolling back a structure from which private debt firms have benefitted, Kencel said Trump will be undoing regulations on business and community banks, specifically on their credit cards, auto loans, mortgages, student loans and consumer loans, Kencel explained, areas of which are certainly out of Churchill’s wheelhouse of financing sponsored deals.
“That’s not our focus,” he added. “These are areas where the middle class – many of which voted for Trump – are more focused. We think that will be the regulatory focus of the new administration.”
In particular, the senior debt market is where non-bank lenders have risen to prominence as the banks pulled out of the mid-market, he added. This new competition could make it more difficult for banks to come back into the space.
“I would say, if you look at the lending Churchill does today – senior cash flow loans – banks had a commanding market share two decades ago,” Kencel said. “Today it’s the middle market non-bank club.”
On the contrary, banks never played in the mezzanine or subordinated debt market and deal flow has always been less robust, he said.
“The firm sees the mezzanine and junior debt investment space as more competitive than the senior lending space. The favorable supply/demand dynamics we’ve seen in senior loans aren’t the same for junior capital.”
Aside from regulatory pressures, the most important question will be market fundamentals; and on that measure, Kencel is optimistic. The firm expects to invest between $1 billion to $1.5 billion next year.