Future Returns: RBC Global Asset Management’s BlueBay Fixed Income group sees problems ahead for the private lending market
Investors seeking generous yields increasingly have turned to private credit, helping to grow the market into a US$1.4 trillion sector, according to data from Preqin, a London-based provider of alternative markets data and analysis.
Those with a predilection for higher-yielding securities are better off looking at the public high-yield market, where investors can receive rates of 9% on bonds of companies that have lower levels of leverage and far less risk of default, Skiba says. “We’re already seeing leveraged loan defaults running well ahead of high-yield bond defaults in the current cycle,” he said in the note.
In the report, the firm details how the so-called interest-coverage ratio—which determines how many times a company can pay the interest on its loans from incoming cash flow—has slid since 2021 for companies that take out private loans. Currently, these companies only have the resources to pay less than two times their interest costs, according to the RBC note. Those levels are flashing caution, if not a “red alert,” Skiba says.
Also, Skiba says, several so-called “zombie” companies with shaky finances and high-yield debt on their books defaulted in 2020 during the onset of the Covid-19 crisis, meaning the current market is light on default candidates.The situation is different for many private-credit companies that need to refinance at high rates.
But as a flood of money surged into the sector—it was only US$300 billion in size in 2010, according to Moody’s—underwriting standards for the loans weakened, the RBC note said.
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