The personal credit score market was resilient in 2023, however “it’s more likely to weaken within the close to time period,” in keeping with Oaktree Capital Administration.
The funding big mentioned that efficiency final 12 months was supported by “strong US financial progress” and actions taken by personal fairness sponsors and lenders to help weak debtors.
Nonetheless, it famous that corporations at the moment are beginning to see the total influence of latest rate of interest hikes and warned that efficiency might deteriorate going ahead.
Learn extra: Oaktree raises $3bn for up to date particular conditions fund
“We count on an rising variety of corporations to face liquidity challenges within the coming quarters, particularly debtors with unitranche floating-rate debt taken on earlier than 2022,” Oaktree mentioned in its quarterly market replace.
“Whereas most corporations have been capable of handle liquidity issues with short-term options, resembling tapping revolving credit score services, stress will doubtless mount within the coming months if rates of interest keep elevated. Moreover, personal fairness sponsors might not inject capital into struggling corporations to the identical extent that they did in 2023.”
Learn extra: Oaktree Specialty Lending sees rise in annual funding earnings regardless of flat This autumn
Central financial institution coverage might negatively influence the lending atmosphere as central banks look set to maintain charges greater for longer than markets are at the moment anticipating, Oaktree added.
“This will discourage new offers and make it difficult for present debtors to roll over their debt, particularly extremely leveraged sponsor-backed corporations,” the agency mentioned.
Regardless of the challenges, Oaktree famous that demand for personal debt financing seems to be rising and predicted that demand for refinancing is more likely to develop considerably within the coming years as 40 per cent of the direct lending market is ready to mature in 2024 and 2025.
Learn extra: International personal debt fundraising in 2023 barely down from 2022
It additionally highlighted alternatives for various lenders to achieve share in new, specialised markets as a result of weak spot within the banking system.
“For instance, personal credit score buyers are more and more discovering engaging alternatives in all kinds of structured credit score transactions, together with these involving music royalties, life sciences royalties, gear finance, commerce factoring, lender finance, plane finance, delivery finance, and rail automobiles – simply to call just a few,” Oaktree mentioned.
“Loans via these intermediaries are sometimes producing returns on par with – or perhaps a little above – these seen in company direct lending, and, importantly, they usually function a broad, diversified, world asset base.”
