Has the storm already blown over? In this column two weeks ago, we reflected on the findings of a Kroll Bond Ratings Agency report that seemed to indicate most examples of distress would already have come to the surface – indicating that borrowers have demonstrated resilience in the face of the rising rate environment, given that distress does not appear to have become widespread.
While no one should fall into the trap of complacency, that word ‘resilience’ is being used quite widely at present. Only yesterday, Federal Reserve chair Jerome Powell said the US central bank’s staff economists were no longer forecasting recession given the – you guessed it – resilience in the economic data. In Europe – which already experienced a ‘technical’ recession last winter – it should be noted there continue to be fears of a significant downturn towards year end.
One metric that market observers might examine for positive or negative signs is the default rate. We recently reported on a surprise drop in the level of defaults in the US, and it will be interesting to see whether this trend continues in the quarters ahead.
Data this week from S&P on European issuers was a little more nuanced. The number of risky credits went up slightly from the first quarter of this year to the second. However, looking at where credits exiting the ‘risky’ category ended up, in the first quarter it was mostly in default; in the second, it was in “sound operating performance, improved revenue generation capacity and debt restructuring”. In sum: more positive outcomes.
Limited partners will undoubtedly be poring over this, and any similar data they can get their hands on. Our latest figures for capital raising show the lowest amount collected in the first half of this year since the equivalent period of 2016. But while European funds had a particularly tough time of it on the road, every indication we have – both from surveys and extensive conversations with the market – suggests the decline is largely down to practical allocation issues facing investors rather than any deteriorating views of the asset class’s prospects.
It’s early days to claim that private debt has passed the test posed by a very different and challenging macro-economic environment. But there are signs that LPs may be able to take the encouragement they need to recommence oiling the wheels of private debt.
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