Sixth Street Co-CIO Sees ‘Complacency’ in Private Debt

(Bloomberg) — Sixth Street Partners Co-Chief Investment Officer Josh Easterly warned shifting fundamentals inside credit score markets current a threat that many buyers and cash managers are overlooking. 

“Private credit markets are relatively complacent,” Easterly mentioned in a Bloomberg Television interview Tuesday, attributing the issue to a mismatch between capital pouring into the sector and precious alternatives to deploy it. 

“Spreads aren’t moving as much as they should,” he mentioned. 

Investors flooding into non-public debt and credit score total are underestimating the affect of each rate of interest and credit score unfold threat, in accordance with Easterly, who can also be co-president of the agency’s direct lending platform, Sixth Street Specialty Lending Inc.

“Today’s yields are not tomorrow’s yields,” he mentioned, including that as charges are presumably lower sooner or later, floating-rate credit score will return much less. 

Plus, “we’re in an environment of lower growth, which is bad for all investors,” he mentioned. “Credit is honestly really tricky right now.” 

Easterly additionally mentioned Tuesday that Sixth Street sees alternative in offering rescue debt financing to pressured companies as development slows and charges stay greater for longer, however it needs to be somewhat “complex” to be value it.

“In regular-way sponsor finance, we don’t see value there at the moment,” he mentioned. “There is a great opportunity on the more complex side.” 

Easterly has beforehand emphasised how Sixth Street’s direct lending fund is discovering alternatives to construction bespoke financings on to corporations. 

On a May 1 name discussing first-quarter earnings for the direct lending platform, he mentioned that 84% of its new fundings throughout that interval had been originated outdoors the sponsor channel. He cited the fund’s largest first-quarter funding, made to Bourque Logistics, as one instance. 

Last month, the co-CIO mentioned in a letter to stakeholders that Sixth Street Partners anticipates a world of decrease development and return on capital, given greater charges, elevated volatility and elevated threat premiums. 

“In the long arc of the economy, we consider the current upheaval to global trade as more significant than the Covid stimulus and even the global financial crisis,” he wrote, describing that volatility as probably “the most significant event” to affect the financial system long-term. 

(Updates to right firm identify in tenth paragraph.)

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