Private debt in focus

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This is an excerpt from the full monthly report which goes deeper into how private debt is navigating key macro or market themes, current insights from our private debt platforms, and the landscape of the global private debt asset class.

Key takeaways

• The desire for protection via covenants is growing due to the expectation for increased defaults in 2024. Since 2021, the percentage of deals with two or more covenants has doubled while the percentage of cov-lite deals has halved.
• Direct Lending activity is down year-over-year, but has started to increase. There appears to be a balance between lenders and borrowers in negotiations. We are seeing innovative methods come to the market to complete deals.
• Opportunistic Credit is capitalizing on higher rates as leverage issues on investment assets are creating attractive valuations for buyers from forced sellers. Synthetic Risk Transfers (SRTs) are evolving into its own asset class as banks seek regulatory relief of assets on their balance sheet.
• Infrastructure debt is capitalizing on the mega trends of infrastructure and private debt. The team is seeing attractive opportunities in renewables and digital infrastructure.
• Real Estate debt is leaning into multi-family and industrials. The team expects abundant opportunities as $700-800 billion of maturing bank debt is coming due over the next 12-18 months.

Protection is front and center

The opportunity for private debt remains strong amid the ongoing contraction in bank lending. The higher all-in yields, senior position in the capital stack and shorter maturity profile presents an attractive relative value opportunity for investors seeking to derisk public and private equity exposure, in our view. However, the “higher for longer” interest rate environment has the potential to weigh on borrowers and pressure their economic health. The majority of our private debt teams expect to see an increase in covenant defaults and/or traditional defaults in 2024. For lenders, this places an even greater focus on forms of structural protection. Covenants (financial and negative) are one form that allow us to monitor companies and engage early on should key metrics such as leverage or liquidity deteriorate. We expect covenants (quantity and quality) to command a greater part of the negotiations between lenders and borrowers. As one barometer for the market to confirm our thesis, the Lincoln Senior Debt Index (LSDI) in the below chart shows that the percentage of deals with two or more covenants has doubled from 16% in 2021 to 32% in 2023, while equally as positive, the percentage of deals with no covenants has halved from 40% in 2021 to 18% in 2023.¹

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