U.S. banking crisis creates opportunities for private credit

Private credit could benefit from U.S. banking turmoil as private lenders step into a void left by regional banks, creating an investment opportunity, according to two reports out this week.

BlackRock Inc. is favouring private over public credit, with the former offering attractive yields following the U.S banking crisis, a report from the firm’s investment institute said.

“The fallout from the banking sector troubles and further tightening of credit conditions adds to the pressure on public credit but could be a potential boon for private credit, in our view,” the institute’s weekly commentary said.

“We think the rising interest rate environment and increased competition for deposits will put pressure on banks — and cause them to pull back some lending. We see this making room for non-bank lending and private credit to play a greater role.”

Small- and mid-sized companies may see benefits from non-bank borrowing, such as the ease of dealing with one private lender rather than several banks, and not spooking markets by tapping funds from public markets at inopportune times, BlackRock said.

The demand from borrowers creates an investment opportunity for lenders, it said, with more attractive pricing and deal terms.

A report released Tuesday from Toronto-based alternative investment manager Ninepoint Partners LP also said the U.S. banking crisis is creating “bullish tailwinds” for private debt.

“The movement of good quality borrowers from a bank’s loan book to senior secured assets of private debt players is highly attractive from a risk-return standpoint and remains our key focus through our multiple offerings in the space,” it said.

Big banks fund the majority of loans in Canada, Ninepoint said, compared to a more fragmented market in the U.S. where regional banks loan to businesses.

High interest rates are leading to more loan deals in Canada involving borrowers traditionally financed by banks, Ninepoint said, with the private debt industry filling the gap.

Ninepoint noted the fallout from Bridging Finance, the private credit manager in receivership that’s facing allegations of fraud, as well as know-your-product rules that are keeping some investors on the sidelines when it comes to private assets.

Still, Ninepoint maintained most Canadian investors are underexposed to the space, pointing to large pension funds with significant private allocations.

BlackRock highlighted the importance of focusing on deal terms and lending standards, adding that private credit isn’t immune to the credit risk stemming from an economic downturn.

“Yet even after allowing for these more prudent assumptions that would be a drag on returns, the wider set of opportunities for private lenders in the wake of the banking fallout, coupled with the divergence between private and public credit yields is enough to spur an upgrade,” BlackRock stated.