Let’s revisit the key factors and
their evolving impact on the “broken
Market conditions The credit market
shows its resilience
O
ver the past two
years, I have
written two
Private Debt
Investor articles
with a recurring
theme, contemplating whether
the combination of the US Federal
Reserve backstop, investors’ search
for yield and lenders’ improved
workout capabilities had collectively
“broken” the credit cycle, writes
Konstantin Danilov.
According to this view, the broad-
based deleveraging events of years
past would be replaced by complex,
localised pockets of volatility, with
a more robust overall system, for
better or worse. Given the recent
macroeconomic developments, it’s
worthwhile revisiting these themes
to see where we now find ourselves.
Suffice to say that the economy
and financial markets are currently
2 Private Debt Investor • May 2023
in a state of confusion. While
consumers and businesses have
become more cautious in their
spending outlook, other economic
indicators continue to show
significant inflationary pressure,
meaning that the Fed’s rate increases
will likely continue, at least in the
near term.
M&A activity is largely on pause
and the credit markets – bonds
and bank loans – are in a state of
heightened risk aversion. Leveraged
loan issuance fell 35 percent in 2022,
with bond issuance not faring much
better.
This year has brought new
challenges, as a possible banking
crisis and financial instability became
a top concern for policymakers and
market participants alike. However, it
seems that the bolstered credit cycle
has, yet again, withstood this latest
round of challenges.
credit cycle” phenomenon.
1
Fed backstop
While the lingering impacts
of loose monetary policy and
post-pandemic fiscal expenditures
continue to insulate a large portion
of borrowers from the impact
of rising interest rates, the Fed’s
aggressive rate hikes are certainly
being felt. However, the Fed’s swift
actions to prop up the banking
system indicate that, while it is
committed to taming inflation,
the Fed is unwilling to cause any
significant collateral damage.
By stepping in to lend almost
unconditionally to banks against
full value of collateral, regardless of
market value, the Fed demonstrated
that the “lender of last resort”
mentality is alive and well, and will
even be used as a preventative
measure.
2
The search for yield and
the prolific rise of non-
bank lending
The biggest story of 2022 and so far
in 2023, and arguably the biggest
contributing factor, is the continued
ability of private credit funds to gain
market share as bank lending and
syndicated loan issuance dry up.
Even prior to the recent banking
sector turmoil, banks had pulled
back from private equity buyouts,
which allowed direct lenders in on
 The big numbers
several unprecedentedly large deals. “Family offices Investors give thumbs-up to alternatives,
These trends will only intensify need to deliver direct lending returns hold up well,
stable and HPS closes new mega-fund
as renewed focus on regional
predictable
bank regulation will push more of
income and that is
the lending market into the arms driving increased

96%
of private credit funds. Investors’ interest in private
continued demand for this asset debt”
class means that dry powder will
need to be invested even amid Ben Churchill,
heightened risk aversion and chief operating Share of respondents to a Managing Partners
Group survey who have become more positive
volatility, blunting the impact of a officer at Aeon
about alternative assets over the last year
broader lack of credit availability Investments,
from traditional sources. comments on

$270bn
a survey that
found 90 percent

3
The evolution of lenders’
of respondents
strategic options for expect family Volume of commercial mortgages held by
dealing with troubled offices to increase banks that are set to expire in the next year,
loans according to Waterfall Asset Management
demand for
Last, but not least, the reallocation illiquid assets

6.29%
of risk across the lending ecosystem
has heralded a new era of
restructuring. Traditional banks, tied

to a lengthy and tedious workout
process, were often loath to take
Ups Return demonstrated last year by the Cliffwater
Direct Lending Index, which tracks the performance
aggressive action unless there & of 12,000 directly originated mid-market loans

was a clear risk /reward benefit (ie, downs

liquidation of salable collateral).

Private lenders are much more adept
and creative in their approach, often
willing and able to take ownership “Globally, the
$2.5trn
Amount of dry powder residing in
stakes or facilitate complex high inflation
private equity funds, according to
Oaktree Capital Management
transactions. scenario deepens
Firms such as VRS represent a

$17bn
the construction
new generation of restructuring downturn
advisers, who work closely with expected this
lenders and borrowers to bring year and cuts Raised at final close by HPS Investment Partners
for its Strategic Investment Partners V fund, the
about creative solutions – from the growth fifth vintage of its junior capital solutions strategy
rate of global
out-of-court restructurings, debt-
construction

$43bn
to-equity conversions, to Article 9
activity nearly to
foreclosures, ABC’s and cost-efficient
zero”
Chapter 11 363 sales – to facilitate
an effective process of capital From a recent Raised for distressed debt strategies last
reallocation. n Oxford Economics year, according to PDI data
research briefing,

€85m
Persistent inflation
Konstantin Danilov is a director at VRS
could blow hole
Restructuring Services, a boutique
financial restructuring advisory in construction
firm specialising in providing chief
restructuring officer, independent
fiduciary, crisis management and

markets

Raised from four new investors for Polestar Capital’s Circular Debt
insolvency related services Fund, bringing the impact fund’s total raised so far to €187m

May 2023 • Private Debt Investor 3