It’s important to distinguish between the multitude of ‘private placement’ debt investors – there are many investors in a variety of forms which makes the ability to generalise challenging. In the current environment, a key distinction is between true ‘relative value’ players, such as lenders who need to see a ‘premium’ to comparable publicly-traded bonds, and lenders who have much more flexibility.
There is little doubt that the relative value players are struggling in the current market. They are looking at investment-grade bond spreads in the 300’s and finding it difficult to price at a level where borrowers will be willing to secure financing. However, the debt investors who are not relative value are a very attractive capital provider at the moment. These lenders are either specific funds who have raised capital with or without a yield target, or they are investors who are tasked with deploying large pools of specified capital into infrastructure debt.
It is fair to say that these lenders aren’t going to price deals at January spreads, but they do need to deploy capital and therefore can be somewhat more flexible. It’s these lenders who we’ve been contact with throughout the week and have told us they are open for business. Some are saying they will price to their return requirements with little to no market reference, and others are saying “somewhere in the middle”. But what they are all saying is that they are not glued to their screens waiting for spreads to compress before they can place capital again.
The other very interesting development over the last few years has been the move away from banks for these PP lenders: several market participants started to ask if banks were ‘needed’ anymore. Our view has always been that both banks and PP lenders have a role to play, and it was always our assumption that when a downturn came, it would be the banks who would play to relationships and home markets to support assets and sponsors whilst the PP market would somewhat retrench. However, the flexible position that some debt investors have means this isn’t necessarily true to date.
If the impact on the market is a deep recession that sees assets having to go through work outs, the question on many market participant’s minds is whether or not PP lenders have teams who can support restructurings. If not, it may not be a question of who has liquidity, but who has bandwidth to look at new deals whilst trying to unwind old ones.
Another fascinating development from the last week has been the repricing of deals from some banks, which is also something we have heard from a number of bankers. Traditionally, banks can hold prices from when they have credit approvals for three months (which most are still honouring). However, some are changing tact – we understand pricing approvals may now only good for three days.
It should be noted that we have so far only seen banks look to reprice deals when they are funding in non-native currencies (for example a French bank funding a USD deal), and this is a sign that the central bank stimulus programs are working on shore, but the ability to source other currencies is proving difficult – this is being exacerbated when banks’ non-native currency stockpiles have been hit by lenders who are drawing RCFs from other areas of the bank, like leverage or corporate teams sapping liquidity. The impact that other areas of banks have on their institutions is not only of relevance for liquidity, but also impacts their perceptions of risk generally as their fingers are burnt from leveraged finance transactions.
What is clear is that the lack of certainty from the banking market is unsettling and if the PP market continues to show willing, this crisis may further exacerbate their importance to funding infrastructure transactions. This could change rapidly, however, if the market deteriorates further.
Please do feel free to reach out to the team and download our latest credit market report here >