Evening Brief – 02.13.24

“Maturity Wall”

While interest rate cuts by the Federal Reserve are widely expected this year, credit strategies will continue to rise as an anticipated “maturity wall” allows private credit to replace syndicated bank loans and high yield debt, according to the 2024 Asset Management Outlook from Antares Capital, a preeminent player in the private debt space.

The Antares credit team predicts that the amount of performing debt maturing in the U.S. leveraged loan market in 2025 will be $107 billion, rising to $191 billion in 2026 and peaking at $526 billion in 2028.

Syndicated bank loans will also roll over. “We expect to see issuers increasingly consider private credit options when refinancing their syndicated loans depending on their specific needs,” the report’s authors noted.

Beyond the loan market, a soft landing appears to be “increasingly” likely, according to Antares, which even predicts that default rates might drop in the second half of the year. The firm also portrays private debt as an “all-weather” asset class that will perform well even if the economy goes into recession.

Higher interest rates and wider spreads increased first-lien loan yields to as high as 12%. Despite the strong likelihood that rates peaked in 2023, Antares forecasts that direct lending and leveraged loans will continue to outperform high yield and equities, as they have since March 2022, when the Fed began raising rates.

Antares thinks that the Fed will decrease interest rates more slowly than the market expects. Historically, the first interest rate cut occurred approximately 13 months following the final rate hike, placing the first cut in August.

Whenever rates fall, all-in first lien direct loan yields will fall from today’s 11%-12% to 9%, which Antares still considers “attractive.” And the trend may continue to be additive, since lower interest rates may facilitate private equity M&A transactions by lowering the cost of leverage. Ironically, this may increase the need for new loans.

Direct lending leads U.S. middle market loan originations, with loans to sponsor-backed borrowers accounting for 75% of the market share in Q4. Corporate direct lending volumes have also increased from around nothing in 2017 to $113 billion in 2023, with large corporate market “jumbo” unitranche loans of more than $1 billion becoming increasingly popular, according to the report.

Finally, based on previous cycles, direct lending strategies have generally outperformed during a two-year period following the initial rate cut, according to Antares.

Antares also anticipates somewhat more gross and net issuance in the loan market, which has already seen significant growth in 2023. The growth in M&A volume is expected to raise prospects as well, especially given that dry powder is predicted to have increased by 30% since 2021.

“Most managers will say they are bottoms-up fundamental credit pickers at heart, and 2024 may be just the market for them,” the Antares team wrote. “We do believe there continues to be many good opportunities to put money to work at good relative value.”