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Yields, defaults and Brexit: Hermes’ 2018 outlook for direct lending




By Daniel Lanyon on 14th November 2017

https://goo.gl/2sy7Bb

Patrick Marshall, head of private debt and CLOs  at Hermes Investment Management reveals his thoughts for the nascent market for non-bank lending.

 

 

Private Debt in 2018 will see continuing competition among lenders, according to Patrick Marshall, head of private debt and CLOs at Hermes Investment Management, owing to subdued M&A activity and continued high competitive lending from banks.

 

Hermes launched into the private debt/alternative credit space last year with a partnership Royal Bank of Scotland. The strategy is focused on mid-market lending to SMEs in the UK, a booming part of the market for non-bank lending.

 

Marshall says the increased activity within this space will mean a reduction in funds’ “primary pipeline”  and high levels of dry powder amongst direct lending funds.

 

Yields will remain attractive, however, he says, as competition amongst lenders will be centred on loan terms rather than pricing.

 

“However with improving economic fortunes in continental Europe and uncertainty in UK over Brexit, we are likely to see a continued rise in the Sterling premium on loans when compared to Euro denominated loans,” he said.

 

He adds that this could reach as much as 100bps on certain like for like transactions.

 

“In the large cap market, lenders, who compete with the capital markets for providing financing, will continue to have to accept weaker protections such as cov-lite structures.”

 

“This is unlikely to happen to the same extent in the mid-market, where the companies are unable to access the capital markets and are dependent on more traditional forms of financing. The mid-market will continue to offer lenders with the best protections.”

 

As covenants start to tighten on earlier vintages of loans,  he says we could likely  see a slight uptick in defaults.  

 

Although, he adds,  these will remain very low as a result of the benign economic environment and low interest rates.

 

“The slight rise in defaults could mean that some lenders are less present in the primary markets whilst these issues are managed. This will be a year where strong loan origination and lending discipline will be key to success.”

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