Mid-market lenders unfazed by rates, high-yield sell-off

Executives speaking at the Bloomberg Middle-Market Lending Forum said they do not expect the Federal rate rise or recent junk bond turmoil to impact them soon.  

Asset management executives and investors speaking at Bloomberg’s Middle-Market Lending Forum said they were not concerned about the upcoming interest rate hike from the Federal Reserve Bank, as most of the loans they invest in are floating rate. The comments were made just before the US Fed implemented its long-anticipated rate rise, lifting the Federal Funds Rate from 0.25 percent to 0.50 percent on 16 December.

Some of the largest business development companies (BDCs) that invest in mid-market loans frequently report that 80-90 percent of their books are in floating-rate loans.

Lenders have been closely watching high-yield bonds get whipsawed in recent days, though several at the event said they do not think it is time for concern yet. The iShares iBoxx USD High-Yield Corporate Bond exchange-traded fund (ETF) fell 0.9 percent on Monday after declining by 2 percent last Friday, representing the worst drop since 2011. This has led some high-yield bond focused hedge funds to liquidate or suspend redemptions.

Brad Marshall, senior managing director at GSO Capital Partners, speaking on a panel at the New York event said he has not seen the high-yield sell-off affect mid-market loans yet, but that if the decline continues it could impact the mid-market. David Golub, president of Golub Capital, also said that high-yield turmoil is often “a screaming prediction that we’re entering into a recession” though all other indicators seem to still point to a slow growth phase.

“The million dollar question is what’s coming and [what] will it [mean] for mid-market loans?” he said. He and others speaking on the panel said that mid-market loans performed well through the last downturn. Kipp deVeer, chief executive of the Ares Capital Corporation, pointed out that the firm’s BDC outperformed many indices during the last recession by avoiding several industries that tanked.

Both DeVeer and Patrick Adelsbach, head of credit strategies at consulting firm Aksia who spoke on a different panel, noted that manager selection is important. The mid-market lending arena is getting crowded, with many new managers hoping to raise money in a popular strategy that they are not experienced in, they said. “There are a lot of industry buzzwords out there and people have figured what to say, such as statements like ‘we originate in-house,” DeVeer said, pointing out that in many cases where managers are pitching to LPs, this might not be true.

Ares and Golub have been originating mid-market loans for over 20 years. “It’s nice to be fashionable 20 years later,” deVeer said.