Eric Muller, CEO of OCREDIT and Portfolio Manager for Oak Hill Advisors, joined Julie Cooling, Founder and CEO of RIA Channel, at the CAIS Summit to discuss business development corporations (BDCs) and the private credit market.
The T. Rowe Price OHA Select Private Credit Fund (OCREDIT) is a non-traded BDC based on senior direct lending. The fund focuses on large-cap companies with EBITDA above $250 million. The loans are typically backed by private equity sponsors with loan-to-value ratios of 40% to 50%.
Private credit loans are typically floating rate with increases in interest rates experienced over the last three years. While the income earned on the floating rate loans declines with reductions in short-term interest rates, private credit still earns higher spreads than other below-investment-grade assets such as broadly syndicated term loans. OCREDIT uses floating rate leverage, which locks in the spread between the funding costs and the income on the loans.
Lender-on-lender violence is a liability management exercise across different classes of creditors, most frequently seen in the liquid credit markets. Conflicts can be created between holders of first-lien vs. second-lien debt or between high-yield bondholders vs. term loan lenders. Value in these conflicts often accrues to the lender who adds new capital to the firm. The debt load can be reduced by repurchasing debt at a discount after interest rates and credit spreads have increased.
The broadly syndicated loan market is facing a substantial maturity wall through 2027. Over $1 trillion in loans structured during times of very low interest rates are scheduled to mature. One of the big opportunities in private credit is to provide fresh capital to delever good companies with bad balance sheets.
Direct lending for new buyouts, recapitalizations, or transformative M&A can earn 9% to 11% unlevered returns. $2.5 trillion of private credit dry powder could be deployed over the next five years. That is, the private credit market could double in the next five years to meet the needs of financing and refinancing corporate debt.
Oak Hill will be releasing new private credit investments on the CAIS platform, including one focused on opportunistic strategies. Muller notes that a variety of opportunities may be attractive at different points in the credit cycle, including CLO debt and equity tranches, stressed and distressed debt, and lending against infrastructure and other hard assets.
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