ダイレクト・レンディング：2024年に向けた4つの期待

マイラ・チュオン
ディレクター、ヘッド・オブ・キャピタル・マーケッツ
シニア・クレジット

デヴォン・ラッセル
シニア・マネージング・ディレクター
シニア・クレジット

【日本語抄訳】

• エクイティとクレジットを含むプライベート・マーケットにおける潤沢な資金が、M&A市場の回復を後押しするかもしれません。
• ダイレクト・レンダーによるプライベート・クレジット・ソリューションの需要は、流動性が高いローン市場や債券市場からシェアを奪って、今後も伸び続けるでしょう。
• クレジット市場全体のデフォルト率の上昇に伴い、バンク・ローンやハイ・イールド債に比べ、ダイレクト・レンディングの損失は低位にとどまると見込まれます。
• 高金利環境が今後も続くとみられ、投資家が享受している魅力的なリスク・リターン・プロフィールの持続を下支えすると見込まれます。

【英語原文】

Direct lending outlook: four expectations for 2024

Direct lending’s days as an esoteric asset class are no more. Offering the potential for attractive yields, reduced volatility, and portfolio diversification, this substantial segment of the private credit market seems to be becoming a core allocation for insurers, pensions, family offices, and income investors of all stripes. We believe this very moment represents an attractive entry point—and that direct lending is likely to continue shining as a critical part of a diversified portfolio in the year ahead.

1 We expect an uptick in M&A

While merger-and-acquisition (M&A) activity has remained muted for months, near-term pressure to deploy idle capital is mounting. In private equity (PE) buyouts alone, sponsors are sitting on $1.3 trillion of dry powder.¹ Meanwhile, PE’s key stakeholder, the limited partner, is eager to see increased liquidity from maturing portfolios, which have experienced a multiquarter dearth in exit activity. In our view, PE’s growing need for liquidity—paired with the private credit market’s need to deploy $434 billion of its own dry powder¹—will help promote a busier buyout market in 2024.

As monetary policy has proven to be more effective, interest-rate clarity and predictability will likely follow, providing additional support for M&A activity. When the U.S. Federal Reserve (Fed) began its tightening cycle on March 17, 2022, the rate-increase trajectory was unknown. Now, 11 hikes, 21 months, and 525 basis points later, there’s more transparency on how much further tightening may or may not lie ahead.

There will also be increasingly greater clarity about which businesses can handle a higher-for-longer interest-rate environment—and which ones can’t. Since the beginning of the Fed’s tightening cycle, companies that have navigated the higher rates while still managing to sustain margins are beginning to differentiate themselves as good acquisition candidates for PE sponsors. We expect worthy transaction targets to become more obvious with each passing day, prompting greater activity in the year ahead.

While we’re confident PE sponsors will be more bullish about buying, just how bullish remains to be seen. Geopolitical risks are much harder to predict and can quickly dampen or reverse positive momentum. However, on balance, we believe North America remains an attractive market to invest in, and pent-up demand, along with normalizing capital costs, will help buyers and sellers recalibrate expectations, creating a more robust M&A market in 2024.

2 We expect direct lending to expand further as banks retrench

Higher interest rates, persistent market uncertainty, and more onerous capital requirements are prompting a shift within lending away from banks and broadly syndicated loans and toward alternative financing sources. The Silicon Valley Bank, Signature, and First Republic failures in 2023 only accelerated a trend that dates to the aftermath of the global financial crisis of 2008/2009. Financial conditions are likely to continue tightening as banks adjust to increased scrutiny and greater regulatory capital requirements. In the quarter ended September 30, 2023, a large net percentage of banks reported stricter lending standards for commercial and industrial loans, citing the uncertain economic outlook as the chief reason. The banking industry’s mounting challenges—shared, by extension, with the broadly syndicated loan market—have opened further opportunity for direct lenders.

In our view, direct lending will continue to be an important, permanent financing option within the private markets and an increasingly more attractive alternative to the liquid loan and bond markets. In recent months, we’ve seen several large, seasoned issuers refinance out of the broadly syndicated loan market and into the private debt market, and we expect that trend to continue. About $30 billion of debt is slated to mature in 2024—followed by over $60 billion in 2025 and nearly $100 billion in 2026.² The maturity wall in the leveraged loan market is likely to produce more refinancing with direct lenders as more borrowers become willing to pay for convenience, speed, and certainty of execution.

3 We expect direct lenders to experience lower loss rates

While default rates across credit markets are bound to increase in 2024 as borrowers feel the stress of an extended period of higher interest rates, we expect credit losses for direct lenders to fare better than their counterparts holding broadly syndicated loans and high-yield bonds.

Strong relationships between PE sponsors and direct lenders can help portfolio companies better weather stormy periods, a dynamic we witnessed firsthand during the pandemic. Sponsor-club relationships tend to remain close, collegial, and cooperative, and many have been tested through tough times. The ability of sponsors to lower lender consensus risk is greatly enhanced with a smaller group of experienced relationship lenders versus a much larger group in a broadly syndicated transaction. Historically, PE sponsors have exhibited a willingness to provide additional capital infusion and human resource support in times of financial stress and operational challenges. Lender consensus in club-style financing also promotes better lender alignment and negotiating power that could result in higher ultimate recoveries and lower losses relative to what could be experienced in syndicated leveraged loans and high-yield bonds.

Robust reporting and maintenance covenants, which are frequent provisions of direct loans, allow lenders to identify challenges and proactively address an issue before it leads to a payment default. Financial maintenance covenants also serve as tools to closely monitor loans already in default, ensuring a quicker seat at the table and more effective credit management.

4 We expect direct lending all-in yields to remain above 10%

Direct lending all-in yields have historically averaged around 8%; investors allocating today have an opportunity to do better. Given the floating-rate nature of the underlying loans, direct lenders benefit from a higher-for-longer interest-rate environment while maintaining downside protection with rate floors, typically at 1.0%. Combining the forward three-month Secured Overnight Financing Rate curve—projected to average about 450 basis points over the next three years—with direct lending’s historical credit spread would suggest that the asset class stands poised to provide an attractive risk/return profile for the foreseeable future.

We expect all-in yields to remain above 10% throughout the next year—and to average 10% over the next three years.³ Offering the potential for attractive yields, reduced volatility, and portfolio diversification, direct lending combines characteristics unlikely to be matched by other investments in the year ahead.

1 PitchBook, December 31, 2022. 2 The Wall Street Journal, November 10, 2023, wsj.com/finance/how-risky-is-private-credit-analysts-are-piecing-together-clues-79762038?st=69cqpayifvhrup4&reflink=desktopwebshare_permalink. 3 Manulife Investment Management, as of November 30, 2023.