Market statistics for the private placement market sourced from Private Placement Monitor, a standard proxy for the IG private credit market.

While volumes rebounded in Q4, certain themes persisted throughout the year  - notably strong industrial and utility issuance, weaker financial sector issuance, shorter tenors and large deals. Q4 had four US$1 billion dollar issuances capping off one of the most active years for large deals. All four US$1 billion deals were by European issuers as cross border borrowers accounted for more than one-half of total issuance in Q4, something we have not seen since prior to the pandemic. The number of issuances was down significantly year-over-year while the average deal size increased significantly. Also, delayed fundings  - one of the attractive features of the IG private credit market  - dropped significantly from 2022 to 2023, an indication that issuers expected more stable or even lower rates.

Market

Corporate credit: Temporary periods of thin investor demand can lead to the emergence of well-priced opportunities – this is oftentimes true in December as investors wrap up budgets and head to the sidelines. While this year we did not see a noticeable “December premium,” IG private credit pricing lagged the public market for much of the year, resulting in attractive relative value.

In terms of commercial real estate, the market continues to experience unprecedented challenges due to the rise in interest rates and economic uncertainty that have dampened transaction volumes and lending activity. Whilst the current interest rate environment is comparatively favorable when viewed through a long enough historical lens, lending underwriting standards remain conservative amid downward pressure on property valuations and the notion that cost of capital is significantly higher than in-place rates on maturing debt. The result is a growing need for a “cash-in” refinancing to satisfy current underwritten requirements.

Infrastructure debt: Themes in 2023 continued to center around the rising prominence of digital infrastructure and the strong demand for renewable energy. Investment in digital infrastructure is rapidly increasing with the growth in data center development, driven by exponential growth in data consumption and continued cloud migration. Fiber optic networks and wireless communication infrastructure are also seen as expanding areas within the digital sector, as telecommunications providers optimize balance sheets through the sale of high value infrastructure assets to fund future capital expenditures. We expect that the essential nature of digital infrastructure, its strong credit characteristics and its growth trajectory will continue to drive investment and financings. Turning to the second theme of renewable power generation, this space has attracted significant investor attention, thus making it challenging to find adequate relative value. As a result, we are expecting to see better value in the energy infrastructure space in fuel storage, pipelines and liquefied natural gas (LNG) opportunities over the near term.

The area of social infrastructure is also presenting opportunities. Inflation and higher interest rates added delays to the procurement process in 2023 as government sponsors needed time to reassess budgets. We are starting to see some procurement activity resume with projects launching in both the U.S. and Canada in the first half of 2024.

Structured credit: Meaningful activity in 2023 presented some IG fixed rate opportunities. The asset-backed security (ABS) market was busy through the balance of 2023. General spread tightening in Q4 2023 across all ABS segments drove increased selectivity when considering new investments. ABS spread tightening was most pronounced in the unsecured consumer loans and marketplace lending segments, as spreads for those asset types continued to tighten from the relatively high levels experienced in Q4 2022. We expect that the compression in U.S. Treasury yields over the fourth quarter and relative stabilizing in ABS spreads has brought and should continue to bring new ABS issuers to market. The 2024 calendar year looks promising with a number of private ABS opportunities coming to market.

Primary borrower demand and secondary opportunities driven by capital constraints amongst banks resulted in robust deal flow in Q4, fairly consistent with the rest of 2023. In general, spreads across the fund finance market have remained stable with minor variations in select periods of the year and across the various sub-segments. More specifically, in Q4: (i) subscription facilities continued to price wider relative to the first half of the year; (ii) lender finance transactions experienced some minor spread tightening mirroring the collateralized loan obligation (CLO) market; and (iii) spreads in the net asset value (NAV) segment experienced some pressure as new lenders continue to enter the market.

In general, we believe investors are continuing to hunt for diversification, away from the large amount of financial and real estate investment trust (REIT) issuance over the past few years. Despite consistent market volumes, there also continues to be a mismatch as investors are focused on longer duration while issuers are seeking to borrow at shorter durations due to expectations that rates will come down over the next few years. Maturities of seven years or less as a percentage of total issuance has increased materially since rates started to rise in 2022.