KKR & Co. sees a structural shift underway in corporate credit with borrowers moving away from leveraged loans as markets struggle to completely thaw after the banking crisis.
(Bloomberg) — KKR & Co. sees a structural shift underway in corporate credit with borrowers moving away from leveraged loans as markets struggle to completely thaw after the banking crisis.
Institutional loan issuance lagged in the first quarter of the year, while high-yield bond issuance remained relatively strong and private credit continued to take market share, Christopher Sheldon, co-head of credit and markets at KKR wrote in an investor letter seen by Bloomberg.
In Europe, high-yield bonds financed a larger proportion of leveraged buyouts in 2022 than any time since the financial crisis, according to Sheldon.
“Leveraged credit borrowers have been shifting from leveraged loans to high-yield bonds, or sometimes out of leveraged credit altogether and into private credit,” Sheldon wrote.
The leveraged loan market, which private equity firms have favored for debt to finance buyouts, has remained under pressure amid sluggish issuance of collateralized loan obligations, the biggest buyers of the asset.
While secondary market prices have improved in recent weeks, lower-rated deals have struggled to get over the finish line and the market is shut to the riskiest leveraged buyouts.
“Higher ratings are more or less a requirement for the deal to land,” in the syndicated markets, Sheldon wrote. That’s going to increase demand for private credit to fund mergers and acquisitions, the letter said.
A pullback in bank lending after the crisis has also created an attractive opportunity for private lenders who specialize in asset-based finance, according to Sheldon. KKR has seen deal flow in that arena grow as companies look for financing and expects that trend to continue as banks remained pressured.
“For investors, ABF strategies can provide returns that are generally uncorrelated to either the broader markets or to corporate credit,” wrote Sheldon.
Many investors have been sitting on the sidelines and cash has built up in portfolios as capital markets have slowed, said Sheldon in an interview on Bloomberg Television Thursday. Sheldon sees an opportunity for investors to start providing liquidity now where capital has dried up across credit.
“Our view is you need to start deploying now because all of a sudden when confidence comes in, it’s going to be like a tinderbox ready to explode,” he said. “A lot of times, volatility on the way up is so much more vicious.”
KKR’s credit arm, the largest segment of its assets under management, was about $200 billion as of March 31, according to the company’s website.
(Updates to add comments from Bloomberg TV interview starting in 10th paragraph.)
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