Private placement amid today’s financial distress

Moments of financial distress have historically proven to be instrumental to the growth of private credit markets. In prior periods like this when banks have significantly pulled back — such as the 2008 global financial crisis, the subsequent European banking crisis, and during COVID — issuers looked to diversify their respective funding sources, fueling substantial developments in the private credit ecosystem.

Key private credit market insights

While we are still in the early days of this period of stress, here are four current market observations and expectations as we move forward.

1. Neither spreads nor issuance have experienced significant moves thus far. Private spreads tend to follow the public fixed income market with a short-term lag as public fixed income pricing adjusts to current market conditions and the private market then follows. Issuance also takes time to adjust given the longer-term nature of the private deal process. Private placements typically take six to eight weeks to bring a deal to market, including investor due diligence.
2. We expect to see private market spreads widen like public fixed income, albeit with a lag. Despite this temporary delay, private placements have consistently generated a spread premium over comparable public fixed income for more than a decade (Figure 1).
3. In our view, private credit issuance should again increase as it has in past crises, as issuers look to diversify their funding sources. Figure 2 shows historical examples of higher issuance after volatility.
4. We also anticipate covenant and other investor protection enhancements as issuers become willing to accept more investor-friendly terms and higher spreads in return for certainty of execution in a privately negotiated setting.

Figure 1

Figure 2

Bottom line on investing in private credit in distressed markets

As we have seen in the past, there are broader implications for private credit in today’s market distress. We expect once again to see an increase in higher-quality transactions and a wider variety of issuers across the private credit markets, including in private placements. Critically, despite the increased liquidity risk relative to public markets, private placement portfolio quality has historically been resilient in similar periods given the asset class’s investment-grade profile and its priority in the capital stack.

We believe the path forward from today’s challenging environment may echo history, driving the continued development of the private credit landscape and creating compelling private placement investment opportunities.

Figure 1 disclosures

US Private Placement (USPP) Market spreads based on average quarterly spread data from Bank of America. Market average assumes the USPP market spreads are based on ~40% NAIC-1 and~60% NAIC-2 issuance, in line with historical averages. Spreads are at time of issuance over duration equivalent US Treasuries. | Index spreads are based on average daily option-adjusted spread over the period. Please note this data is for informational purposes only and is not meant for broad distribution. Results do not reflect any Wellington portfolio and reflect data sourced from Bank of America. While data is believed to be reliable, Wellington does not guarantee the accuracy or completeness of the data. There may be other private placements in the market that are not captured by Bank of America's data, and they may have had different results. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

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