They said it
“While the economic backdrop remains complex and investor sentiment remains mixed, the peak of the inflation cycle may have passed. We’re cautiously optimistic activity levels will accelerate from here”
Harvey Schwartz, Carlyle chief executive officer, quoted as part of the firm’s Q2 2023 financial results presentation
First look
Rising defaults in leveraged loans
While the default rate for private debt-backed companies remains low – or may even be falling according to some reports – the leveraged loan market continues to paint a different picture.
A new report from Fitch Ratings indicates that leveraged finance defaults will increase in the second half of this year and into next year from their current levels. “Higher borrowing costs and tighter lending conditions amid deteriorating macroeconomic prospects are reducing leveraged issuers’ ability to address refinancing and liquidity needs,” said Fitch.
In the US, high-yield and institutional leveraged loan default rates went up to 2.6 percent and 3 percent respectively in the 12 months to July 2023, from 0.8 percent and 1 percent at the mid-year point of 2022.
By the end of this year, Fitch is forecasting a US default rate of 4.5-5 percent for high-yield loans and 4-4.5 percent for leveraged loans. It’s a slightly brighter picture for 2024, with rates of 3.5-4.5 percent predicted for both high-yield and leveraged loans.
Fitch expects a mild recession in the US between the fourth quarter of this year and the first quarter of next year, causing difficulties for sectors with discretionary demand such as leisure and entertainment.
In Europe, the leveraged loan default rate currently stands at 1.7 percent but is forecast by Fitch to reach 4.5 percent by the end of this year. The high-yield bond default rate, currently at 1.6 percent, is estimated to rise to 2.5 percent by year-end. “Highly leveraged corporates in more interest rate-sensitive sectors, such as real estate, remain vulnerable to approaching maturities,” noted Fitch.
Bootstrap picks up SVB German portfolio
The struggles of the US’s Silicon Valley Bank earlier this year saw a temporary stalling of venture and growth lending due to SVB’s sudden absence from the market and a general lack of confidence. Since then, however, other firms have found ways to benefit from developments.
The latest such example is Bootstrap Europe, the London-based pan-European growth debt manager that has gobbled up SVB’s German portfolio for $64 million from the US’s Federal Deposit Insurance Corp.
The transaction includes $169 million of commitments to a diversified portfolio of technology and healthcare businesses backed by technology and venture capital investors. Bootstrap said the deal fitted its aim to become a leader in growth financing in Germany over the coming years.
“The German ecosystem is one of the most promising for technology debt in Europe,” said Fatou Diagne and Stephanie Galantine Heller, managing partners and co-founders of Bootstrap, in a statement. “The team at Bootstrap has had its sights set on Germany, which sits at the top of its strategic growth map.”
Bootstrap recently closed a €130 million fund for investment in European companies with innovative technologies in sectors such as biotechnology, software and semiconductors.
Senior loans: the positives and negatives
Oaktree Capital Management has highlighted some of the ups and downs for senior loans in today’s environment in its latest Performing Credit Quarterly for Q2 2023.
On the upside:
1. High coupons attracting investors: The spike in reference rates over the last year could make floating-rate loans more attractive than fixed-rate assets.
2. Low issuance supports performance: Activity in the primary market is expected to remain limited – this shrinkage in new loans tends to benefit the performance of existing loans.
3. Stable buyer base means less volatility: CLOs, the main holders of leveraged loans, have limited selling pressure and the asset class attracts long-term institutional investors due to the lengthy cash settlement period.
On the downside:
1. High interest rates a burden to highly leveraged companies: Companies that didn’t hedge their interest rate risk could struggle to service their debt.
2. Slow economic growth may increase downgrades and defaults: In the US, downgrades exceeded upgrades by $81 billion in Q2 2023, while defaults have accelerated and average recovery rates dropped to 40 percent, compared with a historical average of 64 percent.
3. CLO buying activity could decline: CLO creation was erratic in the first half of this year and not expected to accelerate meaningfully before the end of the year.
4. High inflation could harm company fundamentals: Borrowers struggling to pass along cost inflation to customers could negatively impact earnings and leverage ratios.
Reader FYI: Next week only, Loan Note moves from its customary Monday slot to Tuesday (8th).
Essentials
Goldman’s Salisbury moving to Sixth Street
Sixth Street, a San Francisco-based investment firm with $65 billion in assets under management, has brought on board a new partner and co-chief investment officer, Julian Salisbury.
Salisbury arrives from Goldman Sachs, where he most recently was the CIO of the asset and wealth management division. He was responsible for that division’s $2.7 trillion in assets. Of that, more than $450 billion was in alternative investments.
Sixth Street’s chief executive officer, Alan Waxman, said in a statement: “Julian understands how asset owners’ needs and objectives drive the flow of capital around the world, and he embodies our firm’s values of teamwork, integrity, entrepreneurship and making a positive impact on our communities.”
The firm’s investments and strategic partnerships have included Airbnb, AirTrunk, Bay FC, Biohaven, FC Barcelona, Legends, Real Madrid, San Antonio Spurs and Spotify.
Salisbury is expected to begin working at Sixth Street in early 2024. He will be joining a leadership group that includes, along with Waxman, co-president Joshua Easterly, vice-chairman R Martin Chavez, and co-president David Stiepleman.
This month, appearing at Goldman’s mid-year investment outlook for the press, Salisbury spoke about the big opportunity for private debt in commercial real estate and how it will play out in the coming years. “There’s a relative shortage of true Class A offices in growth cities,” he said. “It’s back to this dispersion point. If you own lower quality offices in more troubled geographic locations, it’s very bad.”
Astorri part of OzSuper hiring spree
AustralianSuper, the Australian superannuation fund that has been making a big push into private debt, has made six new senior appointments in the UK including Carl Astorri as head of investments, Europe.
Astorri has been based in Melbourne since 2015, where he led AustralianSuper’s asset allocation and research team responsible for asset allocation, equity strategy and macroeconomic research. In his new role, he has responsibility for building and leading the fund’s London-based investment team as it expands its public and private markets capability.
The fund has also hired: John Normand (head of investment strategy); Sujay Shah (head of internal government portfolios); Deborah Gilshan (head of ESG and stewardship, Europe); William Manfield (head of group risk, international); and Amanda Mitchell (head of corporate affairs, Europe).
BlackRock completes acquisition of Kreos
Specialist venture and growth debt investor Kreos Capital has now been fully acquired by BlackRock.
The firms first announced the deal back in June, with BlackRock saying it would enable it to offer a wider range of private credit products to its investors.
Kreos’ 45-person team, based in London, will integrate into BlackRock’s European private debt platform on 7 August and will continue to be led by the Kreos management team to execute its existing investment strategies.
Moelis & Company acted as financial adviser to Kreos while Goodwin Procter London provided legal advice. BlackRock received legal advise from Skadden, Arps, Slade, Meagher & Flom.
LP watch
Institution: Quincy Retirement System
Headquarters: Quincy, US
AUM: $810 million
Quincy Retirement System has committed $4 million to Torchlight Debt Fund VIII, according to recently published meeting minutes.
The fund launched in May 2022 and held a first close in December 2022 on $858 million. The real estate sector-focused fund has a senior debt strategy that covers the North American region.
Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.
Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing
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