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Private Credit Markets Continue To Offer Dislocation-Based Opportunities

The third quarter of this year delivered a more nuanced market environment than the previous two. Whilst market metrics were generally solid, it was not the “everything rally” seen in the first half of 2021. Instead, dispersion within markets returned as several factors led to higher volatility and changed expectations of market participants.

That’s according to investment manager Värde. In its recent Värde Views: Credit Market Update note to clients, Värde says that the impact of the Delta variant of Covid-19, the return of inflation, political wrangling in the U.S. over the infrastructure spending bill and geopolitical tension between China and the West all contributed to the change in sentiment by global investors.

Värde remains bullish, of course, and particularly in private credit markets. The hotel industry is showing some signs of opportunity.

“Covid related travel disruptions continue to impact the hotel industry - while equity valuations have been quicker to recover, credit and special situations have been slower to react with spreads generally remaining wide,” the firm says in the note.

Being locked down mean that consumers couldn’t spend money on recreation, hospitality, and travel. The consumer ‘balance sheet’ became healthier during the pandemic, with many paying off credit card bills or loans. Government stimulus initiatives also put more money in some consumer’s pockets. Värde sees opportunity here, too.

“The consumer strength noted herein is translating, in our view, to some interesting situations to participate across the capital structure of specialty finance and fintech companies,” says the note.

Companies in all industries have been hit by the pandemic, but healthy ones in particular have arguably been unfairly affected. Credit became harder to come by for these firms in the past 18 months, something which still hasn’t resolved itself.

“…we continue to see common elements as key drivers of value for lenders: high demand for credit from performing borrowers and assets, a constrained supply of that credit, and a supportive fundamental backdrop which has not yet been fully reflected in the price for capital,” says Värde.

Structured products and real-estate related assets in the U.S., and more persistent dislocation in parts of Asia are other areas of the private credit market where Värde sees opportunity; these were also areas that the firm identified earlier in the year.

Värde says that the change in sentiment of investors in the third quarter means that traded and corporate credit have “experienced ups and downs”. Apparently, not so for private credit markets.

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