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Private Credit

North American Private Credit: Assessing the Landscape

April 2023 – 4 min read

The North American private credit market seems to be adjusting well to inflation and rising interest rates, but changes are likely coming, especially if a recession emerges and/or if rates remain elevated for longer than expected.

A Time of Transition

Compared with the last time a recession loomed, the North American private credit market today certainly looks to be in a stronger position. Loan-to-value ratios are now in the 40–50% range compared to ratios in the 60–70% range in the wake of the global financial crisis in 2007 and 2008, providing much more of an enterprise value cushion and incentive for PE firms to support portfolio companies.1 Going into a potential dislocation, interest rate coverage is much stronger now at around 3x, versus 2x in 2007, although coverage has deteriorated with the rate hikes.2 The asset class also benefits from having greater liquidity today than it did before the crisis, when balance-sheet capital at financial companies and insurers was constrained. Until now as well, many companies have been able to raise prices to reflect higher costs without affecting customer demand. Companies also are working on ways to reduce expenses and improve margins.

However, while there are many signs of stability, it is also important to recognize that a lag exists between the time base rates start to rise and the time their effects start to be felt. When second- and third-quarter financial results arrive, it is likely that the impact of rising rates and higher inflation will become more evident. That is when the value of well-constructed portfolios of good companies and the experience of lenders and managers will become apparent. We believe that a conventional recession will reveal the true strengths and weaknesses of managers, and wider and more fundamental disparities in manager performance will be more pronounced.

1. Source: PitchBook. U.S. PE Middle Market Report Q4 2022. As of December 31, 2022
2. Source: PitchBook. U.S. PE Middle Market Report Q4 2022. As of December 31, 2022.

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The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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