Private Credit Yields to Stay High for Longer, Churchill’s Schwimmer Says

(Bloomberg) -- Interest rates will stay higher for longer, providing a yield boost to private debt investors, according to Randy Schwimmer, vice chairman at Churchill Asset Management.

“We’re going to be in a high-rate regime” as the US economy stays strong and the Federal Reserve remains on inflation watch, Schwimmer said in the latest Bloomberg Intelligence Credit Edge podcast. “Yields on private credit will will stay higher for longer.”

Middle-market loans, those that typically fall in a $100 million to $500 million size range and are sometimes as much as $1 billion, are rewarding investors with yields that can reach up to 12%.

“This, right now, is undiscovered value that is hiding in plain sight,” said Schwimmer. Churchill, an affiliate of Nuveen, the asset manager of TIAA, has more than $50 billion of committed capital and focuses on middle-market loans. 

Click here to listen to the full interview with Churchill’s Schwimmer.

Private credit is typically priced at a spread, or margin, over the Secured Overnight Financing Rate, currently at 4.9%. Margins on private loans to smaller US companies average about 500-550 basis points, according to Schwimmer. 

The perception of additional risk and less liquidity compared with syndicated loans means private ones typically pay a higher premium than in public markets.  Middle-market private loans usually mature in five to seven years, but are often refinanced before that.

Spreads Slip

Margins have declined from recent record highs of around 650 basis points, but Schwimmer does not expect them to drop a lot more. He sees benchmark rates holding above 3%.

While elevated interest rates can be good for investors, they may be a problem for borrowers — particularly those with a lot of debt coming due. But Schwimmer does not expect a spike in missed payments or investors having to shoulder losses. 

“Defaults for middle market companies have actually gone down this year, which is surprising given the high rate environment that we’re in,” he said. 

Contributing to the appeal of private credit for investors is its lack of correlation with broader markets because the loans don’t trade, said Schwimmer.

To counter any concern that this means a deal’s value is uncertain, independent third-party experts value all of Churchill’s 300 loans each quarter, assessing fundamental performance based mostly on cash flows.

“If you have three independent [firms] — including your own Churchill-led group — that’s doing those valuations, you’re probably going to get a pretty good assessment of what that real value is,” said Schwimmer.

On the podcast, Schwimmer also discussed:

©2024 Bloomberg L.P.