With interest rates likely to remain elevated, private credit yields are set to stay attractive for longer, according to a report by Bloomberg quoting Randy Schwimmer, vice chairman at $50bn private capital manager Churchill Asset Management.
Speaking on Bloomberg Intelligence’s Credit Edge podcast, Schwimmer highlighted that the US economy’s strength and the Federal Reserve’s ongoing focus on inflation are sustaining this “high-rate regime,” which benefits private debt investors.
Middle-market loans, typically ranging from $100m to $500m but sometimes reaching $1bn, are now offering yields of up to 12%, an appealing opportunity for yield-seeking investors. “This is undiscovered value hiding in plain sight,” Schwimmer noted. Churchill, an affiliate of Nuveen (TIAA’s asset management division), oversees more than $50 billion in committed capital and focuses on these middle-market loans.
Private credit is typically priced at a margin over the Secured Overnight Financing Rate (SOFR), currently at 4.9%, with average spreads on smaller US companies’ private loans around 500-550 basis points. Although margins have softened slightly from highs near 650 basis points, Schwimmer doesn’t foresee a major decline, predicting that benchmark rates will hold above 3% for the foreseeable future.
While these elevated rates enhance yields for investors, they can pose challenges for borrowers, especially those with significant debt maturities approaching. However, Schwimmer does not anticipate a spike in defaults. “Defaults for middle-market companies have actually gone down this year, which is surprising given the high-rate environment we’re in,” he said.
