PDF | Research | Week of July 24, 2023

The Case for Junior Capital

(Part One)

🔔 Subscribe to our YouTube channel: click here

This space has covered at length the investor-friendly changes in senior debt terms since the Fed began its rate hiking regime in March 2022. We recently spent time speaking with junior capital providers about the state of mezz terms today.

“Junior capital spreads have widened out 50 to 100 bps from the end of last year to the end of the first half of 2023,” a top NYC manager told us. “At the same time leverage has declined one-quarter to one-half a turn of Ebitda. That’s a similar dynamic to what we’ve seen in the senior debt market. It’s simply a function of how much debt borrowers can handle.”

How about equity cushions in new LBOs? “Purchase price multiples are still elevated,” another manager reported. “Cash equity percentages have remained healthy...

All-in yields of second-lien loans have risen to keep pace with first-lien upswings.

Contact: Marina Lukatsky / S&P Global Market Intelligence

Capital raising has proved a tough task so far this year, but investor support may be about to return...

US unitranche volume sank further in 2Q23, totaling US$9.4bn, the first time it tallied less than US$10bn since 2Q20. Large corporate unitranche volume totaled only US$5.4bn, the lowest since 4Q20...

Contact: David Puchowski / Refinitiv LPC

Fundraising is in a slowdown, according to PitchBook’s US PE Breakdown. Through H1 2023, about $153 billion has been raised across 160 funds. Compared to last year, those paces are about 25% slower and 15% slower...

KBRA DLD is forecasting a 3.25% default rate by volume (4% by number) for high yield by year end, and a 4.5% rate for syndicated loans (5.5% by number). That equates to nearly $45 billion of HY volume and puts defaulted...

Contact: Eric Rosenthal / KBRA DLD

BDCs were well positioned to benefit from rising rates, given largely floating rate portfolios and the increase in fixed-rate funding following meaningful unsecured debt issuance in 2H20 through 1H22...

Contact: Brad Hamner / FitchRatings

The number of private debt funds closing in North America has remained steady with a slight increase during Q2 2023, as numbers increased from 18 to 20 compared to Q1 this year. Nevertheless, aggregate capital raised fell to $20.91bn in Q2 from $31.98bn in Q1. However, the amount of

capital raised varies from quarter to quarter depending on the close dates of the asset class’s mega funds. Despite the uncertain macroeconomic backdrop, direct lending and higher risk strategies such as mezzanine remain popular, as investors look to optimize their risk/reward ratio.

Contact: Megan Harris / Preqin

Source: VanEck BDC Income ETF, BofA Merrill Lynch US High Yield Effective Yield

Contact: Suneet Chandvani / Debtwire 

Contact: Stefan Shaffer / SPP Capital Partners