Credit managers positive about future despite portfolio challenges – report

While 2020 has been a challenging year for many managers, a huge majority are bullish about the future of the asset class.

Credit managers are bullish about deploying new capital in 2021 after the asset class proved resilient during the coronavirus pandemic, according to research by the Alternative Credit Council.

In the ACC’s annual Financing the Economy report, more than 80 percent of managers surveyed said they were somewhat or very bullish about deploying new capital in the next twelve months, with less than 10 percent saying they were somewhat bearish.

However, firms are also aware of difficult economic circumstances ahead, with most managers expecting a peak in distressed debt opportunities in Q1 and Q2 2021 as borrowers struggle with increased debt burdens and potential threats to their long-term business models caused by the pandemic.

Managers are already taking action on their own portfolios and have been forced to adjust terms to ensure portfolio companies are able to cope with the pressures created by businesses interruptions related to covid-19. The biggest change firms have had to make is covenant waivers or changes as a result of stress in their portfolios this year, but many have also said they have made conversion of cash payments to PIK or introduced payment holidays and moratoriums on interest.

In terms of actions taken to mitigate the impact of market stress, most report there has been an injection of equity by sponsors or business owners and many have also had to provide additional debt finance themselves.

Hurdles firms face in providing additional liquidity to portfolio companies include valuations and uncertainty about future viability, while inability or unwillingness of sponsors to provide additional equity is also a major concern. Significant numbers also report they were unable to access government-backed business support schemes.

A number of lenders reported their portfolio companies have sought government liquidity support, with around three-quarters of managers reporting that up to 30 percent of their portfolio companies have participated in government liquidity schemes. A significant 10 percent have seen more than 50 percent of their portfolios seek finance from these initiatives.

Despite these challenges, managers are positive about the future and the ability of private debt to support economic recovery. Firms reported that their investors are looking to deploy more capital into private credit as a result of the covid-19 pandemic and 98 percent of firms said they are planning to raised additional capital in the next twelve months, predominantly for existing strategies.