Loan Note: US mid-market debt revival; investors plan increased allocations

US mid-market debt issuance shows signs of recovery in the third quarter. Plus: investors reveal plans for increased private debt allocations; and Deer Park Road's new RMBS fund. Here’s today’s brief for our valued subscribers only.

They said it

“Fierce competition for secular-growth champion LBO targets from private debt funds continues to challenge first-lien syndicated loan and bond supply”

Taken from Fitch Ratings’ European Leveraged Finance Chart Book for Q3 2023

First look

On the up: US mid-market debt issuance revives (Source: Getty)

US mid-market debt recovery

After a quiet start to the year, debt issuance in the US mid-market staged something of a recovery in the third quarter, according to research from Fitch Ratings.

The report, using data from LevFin Insights, found that US mid-market issuance increased 26.3 percent year-on-year, to $11.3 billion, from $8.9 billion in the third quarter of 2022. This represented the second-largest quarterly issuance since the third quarter of 2019.

The figures also showed something of a revival in issuance for leveraged buyouts with $2.5 billion of activity in the third quarter representing the largest quarterly volume since the fourth quarter of 2021. Year-to-date issuance is 13 percent higher than at the same stage last year.

Having reached a high of 12.8x in the fourth quarter of 2021, average purchase price multiples for mid-market leveraged buyouts fell to a low of 10.5x in the second quarter of this year but moved up to 11.7x in the third quarter. While average leverage levels stayed the same at 4.2x, equity contributions went up.

There’s a contrasting story on downgrades and defaults. Downgrades “significantly accelerated” in the quarter, totalling 15, compared with just one upgrade. Next year is forecast to see downgrades continue at an elevated level as companies face a possible recession along with higher-for-longer interest rates.

By contrast, only two defaults were seen in the third quarter as the economy outperformed forecasts and businesses drew down liquidity cushions to absorb higher coupon payments.

Investors give vote of confidence

GPs will no doubt be hoping the latest survey from Aeon Investments translates into a boost for the ailing fundraising market. Our data for the first nine months of this year showed just $150 billion was raised for private debt globally – the lowest in an opening nine-month period since 2016.

However, the Aeon study reveals that nearly 75 percent of institutional investors surveyed are planning to increase their allocations to private debt and structured credit over the next year.

When asked about private debt, just under a quarter (24 percent) said they would be seeking a dramatic increase, with around 50 percent targeting a slight increase. When it came to structured credit, 22 percent wanted a dramatic increase and 49 percent a slight increase.

Asked about the main reasons for investing in private debt, 59 percent cited an improved regulatory environment, 58 percent said more choice for investors, 54 percent stated greater innovation and 53 percent said attractive yields and increasingly attractive risk-adjusted returns.

More than three-quarters said private debt would be more appealing over the next two years because of the role of the asset class’s defensive characteristics in risk management in a distressed environment. Eighty-five percent said they expected regulation to continue moving in a favourable direction for private debt.

Awards: Make sure you’re in the running

Once more, we’re asking you to reflect on the year so far and send us your highlights ahead of shortlists being drawn up in no fewer than 50 categories for our Annual Awards.

This year, we have added categories for law firms, dividing their activity up into transaction work and fund formation work. We have also recognised the growth and increasing significance of the secondaries market with a new dedicated global category.

We don’t need to tell you that it’s been a fascinating year for private debt, with many firms citing a rapidly growing opportunity set, as rising rates and macroeconomic volatility have shaken some of the assumptions around who is best placed to provide finance and on what terms in given areas of the market. But while there is opportunity, there is also pressure – for example, fundraising has been at its most challenging for a long time.

We are asking for your highlights up until the deadline of Friday 17 November 2023. Please keep that date in mind, and don’t miss out!


Deer Park’s new closed-end RMBS fund

Deer Park Road has launched a closed-end fund focusing on legacy, non-agency residential mortgage-backed securities, Deer Park Mortgage Opportunity Fund I.

Deer Park Road, based in Steamboat Springs, Colorado, was founded by Michael Craig-Schenkman in 2003 and, 20 years later, has approximately $3.3 billion in assets under management.

Its new fund will invest in bonds trading below their intrinsic value in order to realise long-term capital appreciation and cashflow.

The company’s statement announcing the fund launch quotes chief investment officer Scott Burg as follows: “We believe that liquidity-driven technical factors have driven spreads and relative returns to historically wide levels, resulting in the RMBS sector now trading at levels that offer compelling performance with diminished credit risk.”

Burg, who joined the firm in 2010, also said Deer Park considers RMBS the best risk-adjusted investment opportunity since the global financial crisis 15 years ago.

A spokesperson for the firm said there would be no comment on other particulars, beyond the news release.

New Munich office for Campbell Lutyens

Campbell Lutyens, the private capital advisory firm, has expanded its European presence with the opening of a new office in Munich following regulatory approvals. This adds to its current European offices in London and Paris.

The firm says the office will support the continued growth of its fund placement, secondary advisory and GP capital advisory business, in response to increasing demand from fund managers and investors across the DACH region.

Campbell Lutyens now has a team of more than 230 based across its three offices in Europe and nine offices in the US and Asia-Pacific. The firm says it has raised more than $118 billion in fund placement transactions in the last five years, including just over $52 billion from Europe.

As with the firm’s other offices, the Munich office will provide services across private equity, infrastructure and private credit.

Currency hedging appeal grows

New research reveals that 75 percent of fund managers are hedging their currency risk despite lower volatility.

The research, part of a global series from foreign exchange specialist MillTechFX, reveals that 77 percent of fund managers say their returns have been affected by GBP volatility and out of those that do not hedge, 95 percent are considering doing so given market uncertainty.

The share of fund managers hedging a large proportion of their FX exposure grew from 46 percent in 2022 to 56 percent in 2023 and the average hedge ratio was between 40-49 percent, with 68 percent citing this as higher compared with last year.

Three-quarters believe the cost of hedging has gone up over the past year. Looking ahead, more than half (51 percent) plan to increase their hedge ratio and 50 percent plan to increase their hedge window over the next 12 months.

LP watch

Institution: Kern County Employees’ Retirement Association
Headquarters: Bakersfield, US
AUM: $5.5 billion
Allocation to private debt: 4.5%

Kern County Employees’ Retirement Association has revised its private debt pacing plan to ensure it reaches its target allocation.

The new pacing plan sees the US pension increase its target private debt allocation from 6 percent to 8 percent, which it aims to reach by 2026. KCERA is upping projected commitments from $85 million to $150 million from 2024 until 2026.

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