Private Credit Mania Shrugs Off Mounting Risks in Junk-Bond Market

Private loans are most likely to perform best in credit as other categories of risky corporate debt face more defaults, according to the latest Bloomberg Markets Live Pulse survey.

More than 40% of 387 survey respondents said private credit will outperform over the next 12 months. And that’s despite a majority also predicting weaker returns and lower quality in direct loans, as competition between lenders intensifies.

Private Credit Is Top Choice

Private credit generally involves lending directly to companies at higher rates than publicly-syndicated bond and loan markets offer. Those making such loans say that they can glean more information about a borrower by going direct, and secure better claims on assets if it struggles to pay back.

Because the debt is usually offered at a floating rate, investors benefit when underlying interest rates stay high. It also doesn’t trade very much — if at all — making the loans hard to value, but also less volatile in investors’ portfolios when global markets get choppy.

US junk bonds and leveraged loans have returned about 11% over the last 12 months, compared with a 30% gain in the S&P 500. Private debt investors expect to generate returns in the high teens without the volatility typically seen in publicly-traded debt and equity markets.