Loan Note: Europe reaches a fork in the road on rates; Carlyle spies a financing opportunity

Fidelity says the continuing resilience of the market in Europe hinges on central bankers' rate decisions. Plus: Carlyle's Jason Thomas sees opportunity in borrower pressure; and Brightwood prices its latest CLO. Here’s today’s brief for our valued subscribers only.

They said it

“The Federal Reserve and European Central Bank policy meetings over the past few days have reinforced our ‘higher for longer’ interest rate expectation (alongside a higher cost of capital)”

Taken from BlackRock‘s latest Global Credit Weekly.

First look

Which way now? Europe waits for the bankers’ verdict (Source: Getty)

Fidelity: Central bankers are at a fork in Europe’s road

In a new report, Fidelity International examines the outlook for the private credit markets in Europe as the fourth quarter begins. It finds that the market has proven resilient and there are reasons for optimism: but that much depends on the direction central bankers take.

The default rate in the European loan market was at a historically low level as the year began, at 0.41 percent. Yet as of August, the trailing 12-month par default rate had risen to 1.27 percent. In context of recent central bank rate increases, that remains modest – well below the average since 2007 of 2.92 percent.

If defaults remain low, then given the floating-rate nature of the private credit space, rate increases strengthen absolute returns.

Michael Curtis, head of private credit strategies at Fidelity International, said: “There are two main paths that central banks could take from here – each with challenges for the market. In the first case, a higher-for-longer strategy would start causing problems for borrowers as rising debt costs push interest coverage ratios lower. On the other hand, central banks could pivot to cutting rates – but this would imply a weakening economic backdrop, bringing troubles of its own to borrowers in this space.”

Carlyle sees opportunity in ‘higher for longer’

“Higher for longer” rates is the expectation that comes through loud and clear in an assessment of current market conditions from Jason Thomas, head of global research and investment strategy at Carlyle Group.

The analysis describes the economy thus: “…an economy at (or above) capacity, with a core inflation rate of 4 percent, a US fiscal deficit larger than any that’s preceded it on a cyclically adjusted basis, and a fixed investment boom in the US (also underway in Europe) to combat climate change and achieve self-sufficiency in strategic sectors like semiconductors and green industry.”

Thomas writes: “This is not a constellation of factors that suggests low short-term interest rates are likely to return any time soon.”

To illustrate the pressure on corporate borrowers of higher rates, the analysis refers to public data from business development companies indicating that 12-month interest coverage ratios have dropped from an average 2.25x a year ago to 1.6x at the end of June this year. This was with a base rate of less than 4 percent. At the current rate of 5.4 percent, ICR drops to just 1.2x – meaning that, over the next 12 months, assuming the same rate and earnings environment, interest may consume a whopping 83 percent of operating cash.

The good news for those focused on doing deals is that Thomas believes this to be an “extraordinary” capital deployment opportunity as “easy money has left more companies in need of external finance at a time when it’s likely to prove very expensive”. He expects to see payment-in-kind notes prosper as a solution to debt service burdens as well as “a wave of spin-offs and asset sales” as businesses seek to access liquidity without further deepening their debt burdens.

A call to LPs

Our LP Perspectives 2024 Survey is now live, and we would greatly appreciate your participation as we seek to understand investor sentiment in the private markets today. Here’s the survey link.

Some pointers on this year’s survey:

LP Perspectives is PEI Group’s annual study of institutional investors’ approach to private market asset classes over the coming year. The survey gathers insight on investors’ asset allocations, propensity to invest, performance predictions and views on the wider market.

The results will be published across all our titles.

Respondents will receive the results of the asset class of their choice as a thank you for completing the survey. PEI Group will also donate $5 to UNICEF for each completed response.

The survey takes no longer than 10 minutes to complete, and all submissions will remain anonymous.

The deadline for submissions is Friday 6 October.


Brightwood prices its fifth CLO
Brightwood Capital Advisors, a New York-based private credit firm, has priced a $319 million collateralised loan obligation.

The instrument, Brightwood Capital MM CLO 2023-1 Ltd, is the fifth CLO the firm has issued since 2019.

Brightwood, which has AUM of more than $4.44 billion, according to PDI data, and a base of primarily institutional investors, provides senior debt capital chiefly to US businesses with EBITDA of $5 million-$75 million. It works with both non-sponsored businesses and private equity sponsors.

Brightwood looks to five core portfolio industries: technology and telecommunications, healthcare, business services, transportation and logistics, and franchising.

Sengal Selassie, managing partner and chief executive officer of Brightwood, said in a statement: “We are excited to see robust demand for our CLO platform and to support the continued growth of the middle market. We intend to expand upon our presence in this market, enabled through the support of our loyal investor base.”

CAIS expands the menu on its adviser platform

CAIS, a New York-based alternative investment platform for independent financial advisers, has expanded its menu of strategies and managers by adding Blue Owl Capital, Bain Capital, Fidelity Investments, Neuberger Berman and StepStone Group.

The platform allows investments in private equity, real estate and private credit, and a wide range of structures such as interval funds, ‘40 Act funds, BDCs and non-traded REITs.

A person familiar with the matter said that the private credit-registered products on the CAIS platform saw more than a 111 percent increase in fundraising from Q1 to Q2 2023.

This person also said that many managers who already have their strategies available on the platform have added more, either second iterations or new funds.

The platform offers asset managers technology, a custom online education offering (CAIS IQ), digital marketing support and integrations with leading custodians, reporting providers, fund administrators and transfer agents.

Post-trade technology includes document consolidation and a home office dashboard to showcase the lifecycle of an alternative investment.

LP watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $248.5 billion
Allocation to private debt: 3.63%

The New York State Common Retirement Fund (NYSCRF) has committed a total of $850 million to two private credit investment vehicles, according to the monthly report.

NYSCRF allocated $250 million to KSL Capital Partners Tactical Opportunities Fund II, which follows a similar investment strategy to its predecessor fund, focusing on corporate sectors in North America.

The fund has also committed $600 million to ICG Excelsior, a fund currently in the fundraising phase of $1.49 billion. ICG Excelsior focuses on subordinated/mezzanine debt strategies within corporate sectors across North America.

The NYSCRF is a US public pension fund with a current total value of $248.5 billion and an allocation of 3.63 percent to private investments. The fund’s private debt investments are valued at $9.02 billion.

Today’s letter was prepared by Andy Thomson, with John Bakie, Christopher Faille and Robin Blumenthal contributing