By Daniel Lanyon on Thursday 8 September 2016
Swiss-based Partners Group is bullish on the opportunities for alternative credit post Brexit.
The market fallout from the UK voting to leave the European Union could result in a boost for the alternative credit market, according to Partners Group.
Alternative credit/debt has been a boom area for investors in recent years with more and more fixed income tourists pushed out of the regular bond market thanks to lower and lower yields, which in the case of $9trn worth of bonds have gone negative.
The private investment markets giant, which has over 850 institutional investors worldwide with $55bn in assets under management, says while the first half of 2016 saw a strong continuation of this trend, over the medium term we could see a further boost from Brexit.
Conventional credit markets have so far reacted calmly to the Brexit vote, although the firm says it remains a strong source of potential volatility in coming months and years.
“There is risk of further volatility relating to the uncertainties around Brexit, however, this environment is also expected to be a source of investment opportunity for private debt investors with a longer-term view,” Partners Group said in a statement.
Private lenders, they argue, are well-positioned to provide certainty of execution for issuers who would prefer to avoid taking market risk and move into the market normally habited by bank lenders, should they decide to reduce lending especially to mid-market companies.
“This shift away from the traditional syndicated debt model is the result of factors such as continued market volatility, partially due to reduced Collaterised Loan Obligations [CLO] formation and increased CLO regulation, continued trouble in the energy markets and associated knock on effects throughout the CLO and high-yield markets, and increased regulatory guidelines with regard to leveraged loan underwriting.”
“As such, sponsors are relying instead on support from private debt capital, especially for junior capital tranches such as second lien financings. Banks are adapting to this as well, and pre-syndicating deals to active junior/second lien capital lenders with the ability to take larger hold sizes.”
“Due to these changing dynamics, private debt providers also have increased negotiating power with regard to economic terms and credit documentation. As the current situation is relatively new and continues to evolve, additional pricing volatility is expected throughout the year.”
Mid-market firms, especially Europe have been hit hardest by the economic turmoil of 2008 with banks all but stopping due to balance sheet pressures of new regulation such as Basel III as it forced banks to increase their capital base.
“In Europe, it is especially the mid-market space that continues to offer attractive investment opportunities. Within this space, we have supported a number of companies in expanding their market presence across borders and in scaling up and consolidating their segment,” Partners Group said.
“Mid-market companies are constrained in accessing the high-yield bond or wider syndicated loan markets due to their limited scale. Private debt providers offer flexible and creative financing solutions across the capital structure as an alternative or as a supplement to traditional bank club financing.”