Loan Note: Defaults tipped to rise; latest results from Partners Group

Why high leverage and more defaults don't necessarily add up to a debt crisis. Plus, Partners Group's latest performance and investors gravitating to senior debt. Here's today's brief for our valued subscribers only.

They said it

“This is part of a broader education initiative with Washington policymakers as there is currently a lack of understanding of private credit.”

Drew Maloney, president and chief executive officer of the American Investment Council, which has pitched a private credit white paper to policymakers in the new US administration. Read more here

First look

Defaults to jump, but a debt crisis unlikely
Many companies around the world are highly leveraged but the strength of the economic recovery is likely to prevent a debt crisis in the near future, according to S&P Global Ratings (reports available here, but subject to paywall).

S&P found that global debt hit $201 trillion at the end of last year, equating to 267 percent of GDP. While tipped to ease somewhat – to 258 percent by the end of this year and 255 or 256 percent during 2022-23 – it will stay at an elevated level.

However, global GDP growth is expected to be strong, at 5.0 percent in 2021, 4.0 percent in 2022 and 3.6 percent in 2023. This predicted recovery is based on a successful vaccine rollout, the availability of credit, and adjustments in corporate, government and household spending and borrowing.

But while the economy is expected to prevent a major debt crisis in the near future, higher leverage means higher default risk. S&P thinks defaults may rise to levels last seen in 2009 with the US trailing 12-month speculative-grade corporate default rate hitting 7.0 percent by year-end from 6.6 percent in December 2020 and the European equivalent rising from 5.3 percent to 6.5 percent.

Partners Group misses benchmark but highlights resilience
The alternative assets portfolio of Partners Group, the Swiss private markets firm, enjoyed a generally positive 2020 with private equity, real estate and infrastructure all beating their benchmarks for the 12-month period to the end of last year.

There was one exception, however: with a 2.0 percent return versus a 3.5 percent reference index, private debt came up short. The firm said that while its private debt programmes “provided significantly more stability and less drawdowns in Q1 2020, they benefitted to a lesser extent from the very strong market at the end of the year”.

The firm highlighted the resilience of its direct lending and leveraged loan strategies as it placed emphasis on a conservative and defensive approach.

Partners Group’s annual results can be viewed in full here.

Data snapshot

Senior strength. While private debt fundraising fell in 2020 overall, senior debt fundraising held up remarkably well with $59 billion of capital raised, only a little below the $61.1 billion seen in 2019. Investors have unsurprisingly sought safety during the covid-19 pandemic by looking to be at the top of the capital structure, but they have also notably looked towards larger and more established players with the number of funds raised continuing to plummet.

Essentials

Shawbrook, Caple form partnership
A bank/fintech tie-up sees the UK’s Shawbrook Bank join forces with Caple (see announcement here). The partnership is a reflection of Shawbrook’s ambition to use technology as a way of reaching more SMEs, while Caple will be able to access the larger loan market.

New European hire for HIG
HIG Capital, the US-based fund manager, has grown its European WhiteHorse team with the addition of Michael Lucas as a managing director based in the firm’s London office.

Lucas has 30 years’ experience in leveraged finance and direct lending. Prior to joining HIG, he was a founding partner and head of UK at Bridgepoint Credit. Prior to that, he spent over 20 years at ING where he was most recently global head of financial sponsors.

Prestwich to join Kirkland & Ellis in London
Edward Prestwich, who specialises in advising fund sponsors on setting up and operating credit funds, including special situations, distressed, direct lending, liquid and structured credit funds, as well as establishing carried interest and co-investment schemes, will join Kirkland & Ellis in London this summer from Macfarlanes.

Kirkland & Ellis is an international law firm representing clients in private equity, M&A and other corporate transactions, as well as litigation and restructuring.

LP Watch

Institution: Municipal Fire & Police Retirement System of Iowa
Headquarters: West Des Moines, US
AUM: $2.9bn
Allocation to alternatives: 35.9%

Municipal Fire and Police Retirement System of Iowa has agreed to commit $30 million to Bain Capital Global Direct Lending 2021, according to minutes from the pension’s January 2021 board of trustees meeting.

The fund, managed by Boston-based Bain Capital, will seek to invest in mid-market direct-lending opportunities across North America, Europe and Australia.

The $2.9 billion US public pension has a 2 percent current and target allocation to private debt.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal. 

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