KBRA releases a recap of the 2nd Annual Private Credit Industry Conference on Direct Lending and Middle Market Finance, hosted by the Loan Syndications and Trading Association (LSTA) and DealCatalyst, and held in Fort Lauderdale, Florida, on April 27-28.

Two themes resonated clearly through several panels at the conference. First, higher rates will result in greater credit stresses in manager portfolios in 2H 2023, keeping managers, sponsors, and borrowers busy. And second, credit stresses notwithstanding, industry participants will remain interested in putting capital to work, although their willingness to do so will depend on getting greater clarity around the macroeconomy. Any fallout from the collapse of Silicon Valley Bank (SVB), or pullback in lending from other regional banks, will likely have a limited impact on middle market companies’ ability to maintain access to financing. Conversely, the level of debt and leverage in the private credit market is an unlikely source of broader financial risk in the future. Middle market leverage tends to be relatively low, especially in relation to leverage levels in the broadly syndicated loan (BSL) market.

Key Takeaways

• Rate-driven liquidity stresses coupled with any accompanying slowdown in top-line growth and profitability will create credit stresses in portfolio companies that will need to be resolved.
• The biggest differentiators will be manager scale and experience, investing in companies with proven business models, and having access to a variety of financing options.
• Near-term headwinds notwithstanding, the longer-term outlook for growth in private credit is bright, especially if the industry is successful in finding solutions to tap into nonbank institutional capital. The industry has evolved over the past decade, with several managers developing comprehensive platforms and networks needed to execute their strategies through a variety of financing structures that meet client needs.
• Financing optionality is key for execution in a downturn. Managers who can execute across different financing strategies will be better able to source liquidity for companies.
• Payment-in-kind (PIK) toggles, interest rate hedges, noncash preferred equity, and sponsor contributions will help to bring down the interest burden, although the cost-effectiveness of these solutions is a concern.
• Panels identified regulation as a force that could materially impact the direct lending market’s evolution. Panelists agreed compliance will add to costs and slow execution.
• There is growing interest among U.S. investors for European private credit exposure. However, the fragmented nature of the market has made scaling expensive.
• Panelists spoke of a clear demand from investors to integrate environmental, social, and governance (ESG) frameworks into lending guidelines, as well as a need to develop standardized reporting to track progress against ESG goals.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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