Economic and Market Commentary

Outlook for Private Credit Markets: Finding Opportunities amid Dislocation

Jamie Weinstein, head of corporate special situations, discusses the dislocations we’ve seen in corporate credit markets and the resulting opportunities we are identifying in private credit.

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Jamie Weinstein: First I'll talk a little bit about some of the factors in the market that have really been driving the dislocation in some of these lower-quality sectors and then how that plays into where the potential opportunity is in investing right now.

The dislocation as it relates to more marginal credit participants in the market really has its roots in changes in the structure of the market over the last 10-plus years since the global financial crisis. In particular, very significant growth in corporate credit markets, large growth in both below investment grade and within the investment-grade universe. In the non-investment-grade space, it's really two areas to focus on.

One has been the significant growth in the leveraged loan universe as CLOs have become a much larger player. In leveraged loans CLOs today represent slightly more than half, or at least pre-pandemic represented slightly more than half of the incremental demand for most leveraged loan new issue over the past few years.

Also, the private credit markets have grown tremendously from a size of under $100 billion, call it roughly $80 billion, at the time of the GFC to now today about $1 trillion in total size, so very significant growth in that area. The private capital markets generally always lag the public capital markets in terms of their ability to create new capital for companies.  With patience, we think you can deploy capital over time as companies face significant stresses for those who have, again, not been able to access sources of liquidity and companies utilize the flexibility that they have within the four walls of their business to try to survive this pandemic period.

We think ultimately there will be even higher return opportunities coming later. Some of them might involve restructurings of businesses, or repairs of balance sheets through those new money transactions, but we think that pivot to some of those deals will come as the year moves on and as we move into 2021. We see some of the best relative value today across the landscape in structured products, whether it's in CMBS or high-quality asset backed securities. Some corners of the RMBS that are more credit intensive. That's where we see some of the best near-term opportunities from a dislocation perspective.

We also see some of the recent secured new issue by companies that are under stress needing to raise liquidity and pledging fresh assets that have never been pledged before to issue credit. We have seen pretty good value in those corners as well.

From a distressed perspective, particularly on the more private or less liquid situations, in the near term the opportunity becomes companies that are under real stress where you can access paper in the public markets at deeply distressed levels.

We see our pipeline of the private capital solutions activity really starting to pick up steam. Again, given the repricing that needs to happen in that space, it will be a while before some of those transactions actually close at levels that we find attractive, but we can tell you that definitively the amount of deal flow that we are seeing there is increasing quite strongly.

Disclosure



All investments contain risk and may lose value. Private credit involves an investment in non-publically traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Investments in Private Credit may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond a manager’s control. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk.

Global Financial Crisis (GFC); Commercial Mortgage-Backed Securities (CMBS); Residential Mortgage-Backed Securities (RMBS).

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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CMR2020-0601-1200375

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