Private credit: Can it survive a 'higher-for-longer' environment?
A year on from the inflation genie being released from the bottle, inflation is still nowhere near its long-term target level. As a result, central banks have so far remained committed to their inflation-fighting mandate at the expense of economic growth. Against this background, we examine the impact of a ‘higher-for-longer’ environment on private credit. Active selection and borrower engagement will become increasingly important, in our view, as credit risk typically trends upwards in a recession.
Private credit has fared reasonably well so far in this inflation cycle, but stubborn inflation means we see more challenging times ahead.
Corporate earnings and margins are expected to deteriorate, and real estate debt faces a challenging refinancing environment. Infrastructure assets have been supported by their essential nature and, in some cases, index-linked revenues.
Our preferences continue to be high-quality assets and defensive, counter-cyclical borrowers. Our belief stems from their expected resilience in a stagflation environment, from a proven track record in previous cycles and from low exposure to floating rate debt costs.