The covid-19 shock is causing market dislocations across jurisdictions. As Tobias Adrian, the director of the International Monetary Fund’s monetary and capital markets department, said, credit markets may come to a sudden stop as firms become distressed, and default rates climb, especially in segments like private debt, leveraged loans and high-yield markets.
With borrowers’ credit quality, underwriting standards and investment protections potentially weakening, especially across the riskier parts of the debt markets, PDI has been seeking the view of private debt investors on the new investment environment.
The second interview in our series is with Rahul Kotwal, Zerobridge Partners’ founder and managing partner, based in Hong Kong. “I think obviously the markets have moved quite a lot since the crisis began. And credit is no different. The deleveraging of various asset classes includes private credit as well,” he said.
See all Private Debt Investor’s coverage of covid-19 and its impact.
Research from JPMorgan Asset Management, Guide to the Markets – Asia, Q2 2020, shows asset values have plunged across public markets this year. For global fixed income, assessments of spreads based on the latest available yields on 10 sub-sectors of fixed income suggest that the yield differential between 10-year government bond (10-year average) and US high-yield debt was at its widest in a decade as of 31 March.
For global equity, year-to-date total returns from five major markets all went into negative territory, ranging from -24.2 percent to -16.6 percent.
Major downward revisions of economic forecasts have been ongoing across countries and industries heavily affected by the coronavirus crisis.
Unlike in 2009, China may be unable to help alleviate Asia’s growth rate decline, according to Changyong Rhee, director of the Asia and Pacific department at the IMF, speaking at the organisation’s April press briefing. The IMF disclosed that China would grow by 1.2 percent in 2020, in terms of projected real GDP.
Kotwal told PDI that recovery rates on what private debt investors had thought were secured loans are going to be very different to the historical precedent. “And that will make people rethink how ‘safe’ the private credit business or the lending business in the US will be – jurisdictions do matter, but so do underwriting standards and deal structures.”
Some companies are recapitalising and restructuring their balance sheets to improve liquidity and capital structures.
As PDI reported, among companies that have recapitalised and restructured their balance sheets, Retail Food Group, a Queensland-headquartered food and beverage company, added a new A$76 million ($48 million; €44 million) debt facility that matures in November 2022 as part of its recapitalisation plan.
“From large listed companies in the region to SMEs… it is a defining moment for many because even after market demand comes back, it’s hard to take advantage of that unless you have right-sized your balance sheet for six months plus of significantly reduced revenues,” Kotwal said.
He added that his firm’s debt advisory team is getting inquiries about many private equity portfolio companies. “Especially if you think about the macro theme that most of the [private equity] sponsors have been playing in their investment thesis, the growth of Asian consumers and consumer spend… things like hotels, restaurant chains, consumer goods, it is everything that is just currently getting hit hard,” he said.
Zerobridge has two business models: capital advisory and asset management. The scope of its capital markets advisory business includes raising debt capital and structured financing. Its asset management business manages funds and separately managed accounts in private debt.