Private credit's struggle to regain swagger
Private debt blossomed after the last financial crisis, as European companies grew more sophisticated and sought to diversify their funding strategies away from bank loans and bond markets. But the coronavirus has highlighted its shortcomings, particularly around speed of execution. It may be hard to regain the momentum.
Corporate finance in during the coronavirus pandemic has been a race. Companies made a dash for cash to protect balance sheets when lockdowns vapourised their revenues.
This has meant that despite the perilous damage the pandemic caused European economies, primary activity in loan and bond markets has been sky high. As central banks poured money into bond markets, and with banks better capitalised than heading into the 2008 financial crisis, companies found a receptive audience among old friends, and deals flooded in.
This feeding frenzy, however, was at the expense of private debt. In its most established European markets — Schuldscheine and US private placements — activity has slumped, with both set to endure their worst second quarters in over five years.
Pricing was key and private debt often could not compete with the red hot bond markets.
But speed also mattered and here the shortcomings of private debt were glaring.
In an emergency, speed is of prime importance, which does not suit the slow pace of private markets. Even at their swiftest, deals take two weeks to close. What’s more, the crisis made private debt investors cautious, and some of the smaller buyers focused on their existing portfolios, so marketing took more time than usual, not less.
Whether or not private debt can regain its momentum is an open question. Many hope that companies will start to see accessing all types of liquidity as paramount, and so ramp up debt programmes. But with so many other prescient matters to attend to, will funky debt products be as enticing for corporate treasurers? Only the second half of the year will tell.