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Credit where credit’s due: GoldenTree takes a “highly selective” approach to investments

Investors are increasingly looking to the private credit space to provide investment opportunities. Lee Kruter, Partner & Head of Performing Credit at GoldenTree Asset Management, one of the largest independent asset managers focused on credit, highlights some of the current market dynamics, and how the firm is positioning to capitalise on the opportunity…

What opportunities are emerging in the private credit industry in the near future, and how are you positioning your firm to take advantage of them?

There are multiple themes presenting compelling opportunities. Earlier in the year we focused on first lien LBO opportunities for large companies taken private at attractive valuations. More recently, we financed growth acquisitions for sponsor-backed and public companies that given the complexity of their capital structures or desire to limit the impact on their publicly traded debt, a private credit solution was optimal. While our investments over the last 12 months were predominantly first lien, recent investments include second lien or mezzanine transactions where we secured first lien comparable terms and covenants with higher return potential. As growth slows, we anticipate an increase in stressed issuers that will need liquidity financing and given our distressed expertise, we are well positioned.

What is your view on the current regulatory environment for private credit? How do you expect this to shift?

Over the last decade, regulation limiting bank balance sheet risk led to a shift to non-bank lending for smaller and middle market issuers. Now you are seeing this impact for larger companies. Appetite has waned to underwrite transactions with higher leverage, or to companies in disrupted sectors; these financings are likely to shift to private credit opportunities. US government agencies and European Banks have also sought to transfer balance sheet risk, creating opportunities in residential and corporate assets. Finally, recent US regional baking issues are likely to lead to more regulation, reducing capital available to certain market segments and tightening lending conditions broadly.

How is the interest rate environment affecting sentiment towards private credit?

Relative to the past two decades, yields today remain broadly attractive at above average levels. Given premiums secured in private credit, for newer vintages return potential in the asset class is near cycle highs. However, higher base rates materially increased borrowing costs, causing certain LBO issuers with transactions underwritten for a lower rate environment to have limited free cash flow.

Has the approach to portfolio construction been changing in the private credit industry?

As investor demand for the asset class has increased, so has the size of funds being raised and the focus on maximising origination volume. This is likely to increase return dispersion in a period of more uncertain economic growth and weaker operating performance. Many private credit managers are adding restructuring resources in anticipation that more work will need to be spent on current portfolio companies. At GoldenTree, we are highly selective, focusing generally on 10-15 private credit transactions per year. Our fundamental value approach alongside our 17-person restructuring and turnaround team positions us well.

What is your outlook for the economy, and how are you positioning your firm to capitalise on potential opportunities or mitigate risks in private credit?

We expect growth to slow while rates and inflation are likely to remain elevated. In disrupted sectors such as media, telecoms, healthcare and retail, dispersion has increased and certain capital structures have traded broadly lower, creating opportunities. We also expect an increase in liability management exercises by issuers and sponsors. We remain focused on issuers that can generate healthy free cash flow, increase growth and reduce leverage in a weaker growth environment, and with catalysts to drive performance.

Lee Kruter, Partner & Head of Performing Credit, GoldenTree Asset Management – Lee Kruter is a Partner and Head of Performing Credit at GoldenTree Asset Management. Lee is the Lead Portfolio Manager for the Multi-Sector strategy, GoldenTree Loan Management and the firm’s Corporate Credit and fixed income oriented Structured Product strategies. Lee is a member of GoldenTree Asset Managements Executive Committee, the firms Risk Committee and GoldenTree’s Private Credit Committee. Lee’s leadership has been instrumental in the performance and growth of the firms fixed income offerings. Prior to joining GoldenTree, Lee was a Vice President at Credit Suisse and spent seven years in the Leveraged Finance Research group, where he was responsible for the healthcare and services sectors. During his time at Credit Suisse, Lee also covered various other sectors including metals & mining and wireless & wireline telecommunications. Lee holds a BS in Finance and Management Information Systems from New York Universitys Leonard N Stern School of Business. Lee is also a CFA charterholder.

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