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Credit investors seek alpha as delta variant creates volatility
Credit investors seek alpha as delta variant creates volatility
August 2021 | Issue 237
Hugh Minch
Reporter
The leveraged loan and private debt markets have been on a tear for the first half of the year, but analysts are forecasting a more volatile six months ahead, as regular technical factors meet the modern challenges of reopening peculiarities and potential covid variants.
The week before Creditflux went to press was the first flat week for loan retail funds in the first six months of the year, as investors move money between loans and high yield bonds based on rate expectations.
Philip Raciti, head of performing credit and portfolio manager at Bardin Hill Investment Partners, welcomes a more volatile market.
“It’s much easier to ramp a new CLO when there’s a little bit of volatility in the market, rather than in a market where you only have spread compression,” Raciti says. “It may be that you see a drawdown of as much as 50 basis points, but it won’t last weeks — it will last just days, because everyone’s going to try and take advantage of it quickly, as many are set up to do.”
As for the delta variant of covid-19, most credit market participants are cautiously optimistic that the wave will not lead to further economic contractions. Data from the UK shows cases falling sharply despite an open economy.
“It’s easier to ramp a new CLO when there’s volatility”
Philip Raciti, Head of performing credit | Bardin Hill Investment Partners
“Delta is a manageable event and isn’t changing anyone’s spending patterns,” says Raciti. “People feel a level of protection and they’re confident to go about their business. However, we are proceeding with caution due to the potential for a new more virulent variant.”
“I think covid is something we’re just going to have to live with,” says Ted Goldthorpe, partner and head of BC Partners Credit. “We’ll have stops and starts over the next couple of years, but I don’t think it’s going to lead to a wholesale shutdown.”
Goldthorpe says the biggest challenge for direct lenders is consumer discretionary businesses that benefited from the pandemic. While 2020 saw investors exclude hotels, restaurants and leisure from their portfolios, this year pickup trucks and e-commerce are proving more challenging.
“A lot of businesses got a big benefit last year from the shutdowns and the stimulus,” Goldthorpe says. “Now they are all trying to refinance themselves, but what ebitda do you use?”
Loans and CLOs both softened towards the end of July, though supply on both the asset and liability sides is shaping up for a record month of August, sources say.
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Global credit funds & CLO's
August 2021 | Issue 237
Published in London & New York.
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