Private Credit Outlook 2024

The private credit market has grown significantly in recent years, with both borrowers and lenders interested in the flexibility and customization of private transactions, especially as banks are constrained in their lending activities. In an environment of higher (albeit potentially moderating) interest rates, and in light of significant refinancing needs (Commercial Real Estate alone will see $1.5 trillion in debt mature by the end of 2025), private credit investing offers appealing opportunities.

Stronger documentation, higher base rates, and attractive spreads present continued opportunity for direct lenders to earn attractive returns. On the other hand, signs of stress and dislocation in leveraged credit markets are appearing, which contributing to our belief that 2024-25 may present compelling opportunities in stressed and distressed debt.


Source — Source: Pitchbook.

Below we highlight the drivers of Pathstone’s positioning in Private Credit. For further detail including specific opportunities, please speak with your Pathstone advisor.

Distressed Corporate Credit

Elevated interest rates continue to pressure smaller, unhedged borrowers. Lower-middle market issuers face more acute stress as they struggle to offset floating rate debt costs with EBITDA growth. Corporate bankruptcies are trending to a 13-year high, with downgrade rates from “B” to “CCC” rising to 8% . Rating agencies such as Fitch are projecting default rates of 5.5% across high yield issuers in 2024. Further, consumer credit delinquencies are elevated. Consumer-reliant sectors are already under pressure as the leading contributors to defaults counts in 2023. Risks of a slowing economy exacerbate this stress.

Underlying trends include:

  • The underlying credit quality of the High Yield index has deteriorated materially. Approximately 25% of the index is currently rated B- or lower, compared with around 5% of the index in 2008.
  • Record loan issuance over the past several years, often with weak documentation, has also significantly expanded the absolute size of the opportunity set.

Private credit managers are capitalizing on new loan origination opportunities at meaningfully higher base rates. Notably, tighter credit documentation appears to be returning to lending markets.

Vehicle format & liquidity matter. As smaller companies face pressure to service floating rate debt, we remain in dialogue with several distressed, turnaround, and deep value managers poised to capitalize on opportunities to put capital to work.

While the opportunity set appears attractive, it is challenging to time cycles. We continue to prefer well-capitalized and experienced managers unburdened by stressed legacy portfolios. We look for managers we believe can generate strong risk-adjusted returns in benign and stressed market environments, ideally in shorter-duration vehicles (<10 years).

Stressed Real Estate Debt

Looming maturities, higher rates and banking stress are driving dislocation in U.S. Commercial Real Estate (CRE) debt markets. Underlying trends include:

  • Commercial Mortgage-Backed Securities (CMBS) spreads have widened as borrowing costs and perceived risk remain elevated across several real estate sectors. Non-performing loan sales by banks appear likely.
  • Regional banks continue to hold higher concentrations of CRE loans relative to larger peers and remain constrained in their ability to originate new financings.
  • Maturity walls arrive while banks are retrenched. CRE loan origination reached peak volumes in 2021-22 with significant regional bank participation. With an estimated $1.5 trillion of US CRE debt maturing before the end of 2025, and interest rate hikes continuing to pressure debt service payments, we expect an uptick in non-performing loan sales.


Source — Source: Federal Reserve Economic Data (St. Louis Fed).

Experienced operators protect on the downside. When acquiring stressed or non-performing loans, we prefer cycle-tested managers able to source off-market opportunities and operate assets if necessary.

Pathstone Allocations

Performing private credit across real estate sectors remains a core allocation in PMA credit portfolios. We are currently allocating to a core all-weather offering with the flexibility to originate private loans or acquire traded securities.

We are also allocating to opportunistic strategies that pursuing distressed corporate credit and stressed real estate debt. Each serves a distinct role in portfolios and can be used together or separately, given prudent sizing.

  • In distressed corporate credit, we are focused on a mid-market strategy pursuing restructurings, performing distressed, and spread compression trades.
  • For stressed real estate debt, we’re following an opportunistic strategy acquiring U.S. CRE loans from banks along with select traded securities.


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