How sweet it is to be a non-bank lender

Cash-rich asset managers that have been singing the praises of private debt are sitting pretty in the credit space, especially now that regulators are said to be contemplating a 20 percent increase in bank capital requirements in the midst of the regional banking crisis.

From KKR seeking $650 million of direct lender financing for its $1.6 billion purchase of Circor International, (with KKR’s Capital Markets group acting as the lead left arranger, according to a source familiar with the firm) to Blackstone negotiating with regional banks to purchase loans for the portfolios it manages for its insurance clients, private debt does seem to be having its moment.

“The dislocation in the syndicated loan market has created opportunities for us, both in buying asset portfolios from banks or stepping in to provide capital where banks are no longer as willing to provide it,” Dan Pietrzak, global head of private credit at KKR, recently told Private Debt Investor.

Although concerns are growing about the faltering commercial real estate market, asset-backed loans to consumers – at least those with good credit – have so far held up relatively well. Unlike in the global financial crisis of 2008, which was precipitated by subprime credit issues, today the sharp and quick rise in interest rates has created risks in banks’ securities holdings, but not their loan assets.

Ironically, the “risk-free” Treasury securities that banks purchased post-GFC out of an abundance of caution have increased their duration risk and provided an opening for asset managers.

“Marketplace discipline is being imposed on the US banks but not the non-bank banks, creating an uneven playing field,” said Charles Peabody, a founding partner and president of independent bank research firm Portales Partners. Peabody said that big asset managers “are spinning a positive narrative that they are ‘quote unquote’ filling a void left by the regional banking system”. He maintains that banks such as PNC or Truist could in fact buy some of the same loans that are being sold to the big asset managers, if not for fear they would be punished by the marketplace.

Meanwhile, the real estate cycle, which has a very long tail, has yet to play out. While bank balance sheets have become much stronger, asset managers not subject to the same regulatory constraints as banks “have become too big to fail”, Peabody says. And that could present problems down the road if one of them gets into trouble from a funding or liquidity perspective.

Write to the author at robin.b@pei.group