Secondary market develops to aid private credit liquidity | Report: Stress building in private credit market | Commentary: Bank partnerships forge new path for private credit
Financing conditions improved in early 2024 amid expectations of rate cuts and slowing inflation, and many companies capitalized on the window to refinance upcoming maturities. Investment-grade and speculative-grade bond issuance jumped by 26% and 66%, respectively, and leverage loan volume doubled year over year. Recent inflation data and geopolitical tensions could shift market dynamics, leading to more challenging refinancing conditions and potentially closing the window of opportunity for some firms to refinance.
Growth in private credit has led to difficulty exiting some holdings, but a solution is taking shape in the form of portfolio sales, which are expected to triple this year to an estimated $15 billion. Such deals allow for early exits at discounted prices, typically around 85 cents on the dollar, and the secondary market can help tackle liquidity challenges in the private credit market.
The private credit market is showing signs of stress that could worsen in a higher-for-longer rates environment, according to a report from JPMorgan Asset Management. The report cites deteriorating interest coverage ratios among borrowers and comes despite relatively low default rates over the past two years.
Private credit firms' share of the leveraged loan market has been growing, but banks have so far recouped more than half of the business lost to private credit last year, PitchBook data shows. Private credit firms likely will continue to grow and expand into new asset classes, but those moves will encourage more partnerships with banks, with private credit taking on the riskier lending, writes Huw van Steenis of Oliver Wyman.
Borrowers have swapped some $16 billion of debt from direct lenders into bond markets or syndicated loans so far this year, according to Bank of America. The shift is attributed to borrowers' ability to secure lower rates and avoid more stringent covenants on the public side of the market, as well as the ongoing rally in credit markets.
Borge Brende, president of the World Economic Forum, has expressed concern about global economic conditions, noting that the current levels of debt are the highest seen since the Napoleonic Wars in the 1820s. Brende noted that "we are getting close to 100% of the global GDP in debt."
CME Group will start trading US corporate bond index futures on June 17, the company has confirmed. The contracts will be based on the Bloomberg US corporate index and the Bloomberg high yield very liquid index.
Options markets are pricing in a 1-in-5 chance the Federal Reserve will increase interest rates during the next 12 months, up significantly from the beginning of the year. Inflation has remained higher than expected, creating a possibility the Fed will increase rates again. This has sent the 2-year Treasury yield to a five-month high of 5.01%, while stocks experienced the longest losing streak in 18 months before making gains Monday.
Criticism of the Basel III endgame proposal is mounting, with Federal Reserve Governor Michelle Bowman calling for a reproposal. BlackRock's director of market structure, Michael Winnike, stated the firm has significant concerns about the implications for underlying clients, while SIFMA Chief Operating Officer Joseph Seidel has said the "most prudent path ahead would be for the agencies to withdraw the proposal and repropose the entire rule for public comment."
The Bank of England has ordered a number of UK banks to start stress testing their relationships with private equity giants and portfolio companies after it found they were not able to measure their exposure. The UK Prudential Regulation Authority said it expected banks to "comprehensively identify, measure, combine, and record risks" related to the companies they back.
The UK Financial Conduct Authority is increasing its scrutiny of nonbank financial firms and their wind-down arrangements. These arrangements are a crucial component of the capital and liquidity rules drafted by the FCA, but few firms have drawn them up as the industry plays catch-up to the regulations.
A sweeping ban on noncompete agreements by the Federal Trade Commission has pushed financial firms to adjust long-standing business practices that relied on these contracts. The decision forces industries across finance to find new ways to retain employees, secure proprietary information, and maintain competitive practices in the absence of noncompete clauses.
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