Private Credit: Investing in a Higher Rate Environment

While slower economic growth and higher interest rates have dampened M&A deal activity, private credit investors can stand to benefit in the current higher-for-longer interest rate environment. Prospect believes this current rate environment provides an opportune time for allocators to consider investing in private credit.

Higher Interest Rates May Benefit the Asset Class: Private credit investments often have floating-rate structures that apply a spread to a benchmark rate, typically the Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and closely correlates to the Federal Funds rate. To combat rising inflation, the Federal Reserve raised rates from near 0% to above 5% over the past twenty months. As a result, private credit yields today have reached levels not seen in over a decade.

Lower Leverage May Mitigate Default Risk: Current higher rates have led to lower leverage being placed on new originations as lenders focus on borrower ability to service debt. Lower leverage mitigates the risk of default, especially if rates decline, as companies will have less fixed charges and resulting higher ability to service debt. Additionally, lower leverage implies larger equity cushions and lower loan-to-value, which mitigates downside risk.

Sources: (1) Federal Reserve Economic Data; (2) Pitchbook Leveraged Commentary & Data (LCD)

Disclosures

Past Performance is not indicative of future results

Prospect Capital Management L.P. (“Prospect”)
Prospect is an SEC registered investment adviser that was founded in 1988 (along with its predecessors). Prospect invests across the United States in diversified portfolios by industry, company, and situation, and its proprietary underwriting process and metrics have been developed over more than 30 years and through multiple economic cycles. Prospect has over 100 employees and $11.7 billion** of assets under management as of June 30, 2023. With a buy-and-hold mentality, Prospect’s objectives are to preserve capital by making credit and equity-focused investments at reasonable multiples of recurring cash flow, earn attractive current cash yields and long-term capital appreciation while achieving consistent low-volatility returns. For more information, call 212.448.0702 or visit prospectcap.com

**The $11.7 billion of Assets Under Management (“AUM”) refers to the assets managed by Prospect and its affiliated registered investment advisors. AUM equals the sum of: (i) the gross assets of Prospect Capital Corporation (“PSEC”), Priority Income Fund, Inc. (“PRIS”), and Prospect Floating Rate and Alternative Income Fund, Inc. (“PFLOAT”), (ii) any amounts available to be borrowed under certain credit facilities of the investment companies, (iii) total managed assets for real estate and structured credit investments, and (iv) uncalled capital commitments. Prospect’s AUM measure includes assets under management for which Prospect charges either nominal or zero fees. Prospect’s definition of AUM is not based on any definition of assets under management contained in any management agreements of the investment companies Prospect manages. Given the differences in the investment strategies and structures among other investment advisors, Prospect’s calculation of AUM may differ from the calculations employed by other investment managers and, as a result, this measure may not be directly comparable to similar measures presented by other investment managers. Prospect’s calculation also differs from the manner in which Prospect and its affiliates registered with the SEC report “Regulatory Assets Under Management” ($8.8 billion) on Form ADV.

This information is educational in nature and does not constitute an offer to sell or the solicitation of an offer to buy any securities. Recipients should not view the past performance of middle-market loans as being indicative of future results. Prospect is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. All investing is subject to risk, including the possible loss of principal. Prospect cannot guarantee that the information herein is accurate, complete or timely. We make no representation or warranty in respect of any information derived from the third-party sources which has not been independently verified.