The potential for a “higher-for-longer” cost of capital environment remains a priority for market participants, according to a new report.
The BlackRock report ‘Navigating Higher Rates in Private Debt’ authored by Amanda Lynam, head of macro credit research at BlackRock, highlighted the increasing default rate in the USD-syndicated leveraged loan market, indicating fundamental pressure on parts of the public credit landscape.
Examining data from the Cliffwater Direct Lending Index and the Lincoln International Senior Debt Index for Q2 2023, BlackRock observed that losses in the private debt sector are “normalising” but are still relatively controlled.
Additionally, a recent reduction in covenant defaults suggests companies are proactively collaborating with long-term lending partners to counter the impact of higher debt costs on their fundamentals.
“Private debt markets offered a notable yield pick up versus public markets as of 2Q2023, and we expect this to increase further in 3Q2023, based on the spread between large corporate and middle market syndicated leveraged loans,” added the report.
BlackRock said this situation presents an opportunity for investors to allocate capital to specific segments of private debt, such as senior direct lending, which offers “relatively attractive yields,” providing structural protections and prioritising selectivity in a highly dispersed environment.
The report also evaluated the decline in services activity in the Euro area, aligning with weak manufacturing data.
It added that this confluence of low business activity, increased price pressures and higher borrowing costs could challenge corporate credit quality.
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