Loan Note: US BDCs face looming headwinds; Europe’s deal market looking rosier

Fitch warns that business development companies may be facing challenges heading into 2024. Plus: Europe's deal market bounces back in Q3 2023; and the Indian private equity firm expanding into private debt. Here’s today’s brief for our valued subscribers only.

They said it

“In commercial real estate, performance across categories remains incredibly nuanced, with some stress now expanding outside of the well-telegraphed office sector”

Taken from BlackRock Private Markets’ Global Credit Outlook 1Q 2024

First look

BDC alert: tougher conditions in 2024 (Source: Getty)

BDCs facing headwinds in 2024

The higher interest rate environment will combine with an economic slowdown to produce weaker credit performance for business development companies next year, according to Fitch Ratings. Fitch has applied a “deteriorating” outlook to the sector.

Fitch said it expects net investment income and dividend coverage for BDCs to remain “relatively strong” in 2024 given the floating-rate nature of BDCs’ loan portfolios and increased use of supplemental dividends.

But it added that earnings were approaching a “high water mark” and will trend downwards due to the emergence of problem assets and higher funding costs.

“The growing maturity wall of unsecured debt coming due will need to be replaced with new issuances that carry higher coupons or higher rate borrowings under floating-rate bank facilities,” said Chelsea Richardson, a senior director at Fitch Ratings.

Fitch said other challenges for BDCs next year could include mid-market deal terms likely to come under pressure from increased competition and less available financing for some BDCs if banks pull back from lending to the sector.

Europe deals bounced back in Q3

The direct lending market in Europe defied economic and geopolitical stresses in the third quarter of this year, according to the latest MidCap Monitor from Houlihan Lokey.

The three-month period saw 96 unitranche transactions closed, compared with 62 in the second quarter, with the key markets of the UK, France, Germany and Benelux all seeing substantial increases in the number of deals. The highest increase (138 percent) was seen in Germany.

Despite some conjecture that the changed financing environment would lead to a dwindling in popularity of the buy-and-build strategy, there was no evidence of this at all in the Q3 numbers – with 50 add-on acquisitions (51 percent of the total) representing a “very significant” increase in these deals quarter to quarter.

With Houlihan Lokey noting that M&A markets have adapted to the economic circumstances, it said the pipeline was building and may deliver even stronger dealflow heading into Q1 2024.

“The change quarter-on-quarter is remarkable and shows a turnaround in optimism by banks and debt funds,” said Norbert Schmitz, managing director in Houlihan Lokey’s capital markets group.

New private debt launch in India

Mumbai-based private equity firm True North has diversified into private credit with the launch of a new business segment, True North Private Credit.

The firm said it had recognised the need to expand its product offering beyond private equity to leverage its capabilities and fully deliver stakeholder value.

Private debt is growing fast in India, assisted by a helpful regulatory framework. True North says it will offer “agile capital solutions to well-governed and profitable enterprises”.

The firm has already launched its Performing Credit Regular Income Fund to provide customised solutions for mid-market companies. The vehicle has already raised more than its target of 10 billion rupees ($120 milllion; €110 million) and is due to achieve a final close at the end of the year.

The fund has completed eight deals so far, fully exiting one and partially exiting another, and has a target internal rate of return of between 15-18 percent.

The platform is headed by managing director Rubin Chheda and chief risk officer Sushim Desai, who joined as the founding team for the credit business.

Essentials

Hammoud on board at Nuveen Private Capital

The two companies that make up Nuveen Private Capital, Churchill Asset Management and Arcmont Asset Management, have unveiled Jamal Hammoud as managing director and senior investment strategist.

In March this year, Nuveen – TIAA’s investment management arm – acquired London-based Arcmont. Together with Churchill, they now comprise Nuveen Private Capital, with $74 billion of committed capital, operating in Europe and the US. NPC is one of the world’s largest private credit managers.

Hammoud will be employed by Churchill and work out of New York, though the statement announcing his hiring says he will “spend a significant amount of time on the ground in the Middle East”. He will be responsible for enhancing Nuveen’s presence and fundraising efforts in that region.

He arrives from Credit Value Partners, based in Greenwich, Connecticut, where for more than three years he focused on identifying investor interest in opportunistic credit strategies in the Middle East and other regions. He has also worked at Milestones Capital, Wall Street Global and Merrill Lynch.

Hammoud will report to Christopher Freeze, Churchill’s head of investor relations. “We are thrilled to have Jamal joining the team,” Freeze said in the statement, “as his investment expertise, client-first mentality and knowledge of local market dynamics will be very valuable as we grow our presence.”

Arcmont was established in 2011, and Churchill in 2006.

Vibrant’s new office in Abu Dhabi 

Vibrant Capital Partners has opened an office in Abu Dhabi Global Market, the financial centre of the capital of the United Arab Emirates.

Vibrant, founded in 2006 in New York, specialises in structured credit and syndicated credit, including CLO management. It manages close to $8 billion for institutional investors.

A wholly owned affiliate of Vibrant, Vibrant Capital Partners International has received financial services permission from the ADGM Financial Services Regulatory Authority to manage a collective investment fund, advise on investments or credit, and arrange deals.

The ADGM office will serve as Vibrant’s international headquarters and will be led by Volkan Kurtas, Vibrant’s founder and chief investment officer, and Alex Nerguizian, managing director.

The company’s statement on the new office quotes Kurtas as saying that ADGM is the ideal base for Vibrant to lead its international expansion plans.

Over the course of two decades, Vibrant has witnessed CLOs and other securitised credit products grow from niche asset classes into critical capital market sectors. Kurtas said the firm is “excited by the opportunity to apply our deep expertise and access in structured credit to help build a robust securitisation ecosystem out of ADGM”.

New head of leveraged credit for Macquarie

Global asset manager Macquarie Asset Management has appointed Vivek Bommi as its new head of leveraged credit.

The Macquarie AM credit platform has three offerings: leveraged credit, private credit and fixed income.

Bommi arrives from AllianceBernstein, where he was head of European and UK fixed income in London for more than two years. In that capacity, according to a LinkedIn post, he was responsible for €16 billion in assets under management. Before that, he was at Neuberger Berman for more than a decade, with numerous roles in leveraged credit including director of research, portfolio manager and head of Europe.

In his new role, Bommi will have overall responsibility for the firm’s leveraged credit capabilities. This will include a role as portfolio manager on the team’s registered high yield and bank loan funds in the US.

Macquarie AM manages close to $5 billion in leveraged credit assets across high yield and bank loans with clients in US wealth and institutional channels. Its credit platform has assets under management of $220 billion.

LP watch

Institution: District of Columbia Retirement Board
Headquarters: Washington DC, US
AUM: $10.49 billion
Allocation to private debt: 2%

District of Columbia Retirement Board announced a private debt commitment of $100 million in its November board meeting.

The DC-based pension fund committed $100 million to Silver Point Specialty Credit Fund III. Managed by Silver Point Capital, the senior debt fund launched in October 2022 and held a first close on $1.21 billion in February 2023.

DCRB currently allocates 2 percent of its portfolio to private debt, against a target of 3 percent.


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