Surprises from the First Half of 2023: In Private Credit, Steady Issuance Despite Challenging Conditions

Despite the run-up in interest rates and broader market uncertainty, the private fixed income market saw fairly typical levels of issuance in the first half of 2023. However, we think the high-level summary data disguises distinct issuance trends among subsectors of the private placement market.

Issuance generally held steady, except in financials

The traditional core issuers of the market (e.g., utilities and high-quality corporates) continued to tap the private markets at relatively favorable spreads versus the public markets. In our view, this is a testament to the broad access to capital that these borrowers have from private market lenders, even in times of uncertainty.

It was a different story in financials (both corporate and structured), particularly after the Silicon Valley Bank (SVB) collapse triggered stress in the sector. In the following weeks, many financial deals operated in a “price-discovery” market, with initial price talks varying materially between issuers as the market assessed the impact of the SVB shock. Financial-related issuers are generally more sensitive to higher debt financing costs and, in our opinion, they took a more opportunistic approach during the turmoil. We saw issuers shorten tenor (the length of a deal), decrease leverage, and even pull some deals, instead opting to wait out the volatility because the potential equity returns were considered insufficient given the debt pricing. Lenders had notable leverage in refining both structural and legal terms during this period.

Positive trends should help drive market share growth amid challenging conditions

Looking ahead to the remainder of 2023, we see three emerging or established trends that are likely to help drive market share to alternative lenders:

• Less competition as we expect regional banks to continue to tighten up their lending and retreat from the private equity and fund finance space.
• The growth of private asset-backed securities (ABS) in new, esoteric areas, particularly in specialty finance.
• The convergence of public and private markets—specifically the continuing trend of direct lending firms moving “up market” into the investment grade space that has traditionally been dominated by public markets and, on the private side, insurance companies.

Despite these positive trends, credit conditions are still challenging for some borrowers, and we expect this dynamic to persist for the remainder of the year. We believe lenders should adhere to rigorous credit underwriting standards and focus on negotiating attractive covenant packages to prepare for a potential increase in defaults.

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Market conditions are extremely fluid and change frequently.