Happy late October everyone!
See below for Fountain Gate Advisors’ latest pulse on the credit markets across the various pockets of debt capital available to middle market borrowers.
Banks
Lots on inward focus at the regulated banks. The ‘held to maturity’ portfolios (think, underwater long duration bond investments), CRE concerns, and expense scrutiny that are in focus in the bank equity stories are resulting in the banks being OK with some balance sheet runoff via loan asset reduction. Client facing bankers are being forced to explain to clients the various justifications their respective institutions are using to slow down loan volume (increasing min EBITDA sizes in lower MM, using ‘lower of last two years EBITDA’ formulations for leveraged cash flow underwritings, minimum deposit requirements, etc.). Some sponsor coverage bankers are reluctant to proactively call on clients until the dust settles on forthcoming RIFs across broader coverage and product teams.
Private Credit
Private credit lenders are showing up with reasonable terms for good credits on recent Fountain Gate exercises. Low LTV’s are pretty important for underwriting theses as PF FCCR/debt service coverage math isn’t great with debt YTM’s in low teens. Tight closing cash flow coverage ratios aside, it is hard to imagine a better risk adjusted slice of corporate credit/alts exposure than 2023/2024 vintage private credit given pricing, attachment points, and structure. Regulated lenders rooting for private credit carnage may be surprised to learn that between floating rate returns enjoyed so far on existing portfolios and quality of transactions currently being originated, coupled with low investment vehicle leverage vs. regulated banks 10x+ levered balance sheets, private credit managers could be fairly immunized from stress over the medium term relative to the regulated banking system.
Institutional
Interesting to see investment grade bond issuance surprise to the upside last week when the 10 year UST touched 4.99% intraday on Thursday 10/19 (rallying a bit to start the week today). The US economy’s most frequent and duration diversified borrowers do not appear to be waiting for meaningfully lower funding costs to come back anytime soon. Broadly syndicated leveraged loan issuance to support LBO’s have taken on a decidedly higher rated tilt this year, with the % of LBO issuers rated B/B+ relative to B- looking a lot more like the higher rated mix of 2010-2015 vs. lower rated mix of 2016-2022 per some great analysis out this week from Pitchbook | LCD. Related, average LBO equity contributions in the broadly syndicated loan market touched 51% for the third quarter of 2023 vs. the 41% average in the 10 years through 2021.
The value to founders and sponsors of having a plugged in and independent financing advocate is clear given the cross-currents in the debt markets today. Reach out to Fountain Gate if we can be helpful with any transactions that you are considering.
