According to the report of financial news, private credit funds supported by Blackstone (BX.US) and Ares Management Corp. (ARES.US) have targeted low-cost financing channels - the investment-grade corporate bond market. At present, they have obtained a record cash scale through this channel. Data compiled by Deutsche Bank shows that since the beginning of this year, private credit funds known as business development companies (BDC) have raised $13.4 billion in the investment-grade bond market in the United States; it is almost twice the $8 billion financing amount for the full year of 2023 and also the highest level since 2021 ($21.4 billion).

The bond sell-off has pushed funds into the investment-grade bond market, which already has a lot of liquidity. And the funds that private credit funds can invest in have reached a record level of about $500 billion - but the opportunity to invest these funds is increasingly limited due to the depletion of leveraged buyouts that usually provide funds for private credit.

But in the investment-grade corporate bond market, investors generally ignore these risks, which highlights how strong the demand is for bills with relatively high credit ratings. In some cases, BDCs now find that financing in the unsecured corporate bond market is cheaper than financing in the secured market. Last month, Blackstone's secured loan fund borrowed $400 million in unsecured high-grade bills at a price 145 basis points higher than the benchmark rate. By comparison, regulatory filings show that most of the company's outstanding senior secured financing tools carry higher interest rates than this level.

Logan Nicholson, managing director of Blue Owl Capital, said: "When you can get cheaper financing, you can also invest at lower rates, and with interest rates at current levels, returns remain attractive. With the appearance of spreads, it helps us remain competitive in existing transactions. "

Data shows that the spread between private lending and the US benchmark loan has been between 475 basis points and 550 basis points recently, reaching or near a historical low. Borrowing funds for oneself at a lower cost is a leverage that private credit companies can use to partially mitigate the negative impact on returns.

In May of this year, Ares Strategic Income Fund, which was established for about a month, issued $700 million in 5-year bonds, Morgan Stanley's fund issued $350 million in 5-year bonds, and Blue Owl Credit Income issued $500 million in 5-year bonds. Earlier this week, HPS Corporate Lending Fund (HLEND) issued $400 million in 5-year bonds, becoming the latest BDC to use low borrowing costs.

According to Bloomberg analysts David Havens and Nick Beckwith, favorable capital markets, reduced economic concerns, and record fund stocks all contribute to double-digit growth in the private credit market. They noted that banks have already prepared by issuing bonds, building credit curves, and increasing liquidity.

Doug Conn, chief investment-grade strategist for SMBC Nikko Securities America, said that the refinancing needs of BDCs, which first entered the market several years ago, are also growing. Although borrowing costs have risen significantly due to the Fed's substantial interest rate hikes, he expects BDCs to continue to issue bonds.

Josh Warren, co-head of North America FIG Debt Capital Markets at Deutsche Bank, estimates that BDC bond issuance is now 68% faster than in 2021. He said, "the industry has the ability to create new volume records."

The fundraising flexibility of private credit funds is increasing.

BDC was created by the US Congress in 1980 to promote employment growth and increase lending to US small and medium-sized enterprises. They usually raise equity from investors to lend to intermediaries whom banks consider too risky to lend to. In recent years, they have also started to sell corporate bonds.

A key feature of these investment tools is that they distribute most of their earnings as dividends to investors, so investors do not have to pay corporate income tax. According to Warren, in order to generate expected investor returns and maintain appropriate leverage, these funds need to use debt to meet the inflow of equity capital.

Brendan Murphy, Head of US Investment Grade Syndicate at Deutsche Bank, said that as the private credit market develops, issuers are becoming more familiar with investors, and confidence in secondary market liquidity is rising, making relative value comparisons within the industry easier. More funds are pouring into private credit funds from wealthy investors, retirement plans, sovereign wealth funds and even banks.

Andrew Bellis, private debt director of Partners Group headquartered in Switzerland, said: "Banks are striving to provide leverage to private credit funds. This is a good opportunity to achieve greater flexibility and lower prices, which also helps us maintain a stronger competitiveness." Although private credit financing slowed down in the first quarter, limited partners still remain committed to investing in this asset class and plan to continue allocation.

Matt Brill, head of North American investment credit at Invesco, said in reference to BDCs that "This certainly calls for a more nuanced approach to credit." Brill added: "In 2020 and 2021, with the outbreak of the new crown epidemic and the bankruptcy of Silicon Valley Bank and Credit Suisse last year, many investors are very nervous about them."

Brill added that these debts usually trade like BB bonds. Bill Zox, portfolio manager of Brandywine Global Investment Management, said that although they performed well last year, their trading rating ranges are still wide. He said, "In the case of a hard landing, their trading will be more like CCC bonds than BBB, and the possibility of this is not zero."

The market size has surged to $2 trillion, and private credit has become a hot topic on Wall Street.

The size of the private credit market has grown rapidly from about $250 billion in 2010 to about $20 trillion today, and will continue to grow at a double-digit percentage in the coming years. Private credit is a type of private loan granted by sources of funds such as pension funds, insurance companies, donor funds, and foundations to private enterprises. Private credit is highly dependent on direct loans and one-to-one relationships, while traditional loans are provided through banks or groups of investors.

Why has private credit become so popular? After the global financial crisis in 2008, the Fed lowered interest rates to zero, forcing all market participants to compete for a small amount of profitable assets. This created an environment where alternative investments could gain an advantage. At the same time, due to stricter regulations and capital and liquidity requirements, large banks have withdrawn from higher-risk lending areas. Therefore, private credit has finally become one of Wall Street's hottest investments.

It is worth mentioning that the interest rate of private credit is floating. Some people worry that as interest rates rise in response to inflation, this may ultimately harm borrowers who cannot afford higher repayments, especially in the event of severe economic recession or in low liquidity or transparency environments. Insiders in the private credit industry believe that their matching financing model is safer than traditional banks-traditional banks face the mismatch of short-term deposits and long-term loans, and may face a run on funds during crises, and private credit is also a source of credit creation that supports the US economy.

Private credit is under pressure.

However, warnings about the private credit market are getting louder. Colm Kelleher, Chairman of UBS, stated in November last year: "There is clearly a bubble in the private credit sector, which only needs one thing to trigger a credit crisis." The International Monetary Fund (IMF) has also warned that due to liquidity demand and borrower quality, the private credit market requires more scrutiny. Jamie Dimon, CEO of JPMorgan, recently stated that there are no systemic risks in private credit, "but I do expect there to be problems."

A year ago, Jon Gray praised that private credit was entering a "golden moment," but now the luster of this new money tree on Wall Street has faded. The pace of acquisitions is slowing down, and some private credit funds are struggling to return cash to investors. Banks are coming back, competing for trades and competing with lower profit margins than direct lenders.

Matthew Bonanno, Managing Director of the Credit Division of Pan-Atlantic Capital, said: "The liquidity premium of private credit has declined." "I think limited partners (LPs) are somewhat frustrated with this," he said, referring to Wellspring Pension Plan and limited partner capital allocators such as insurance companies to private credit funds.

Some funds are unable to return sufficient capital to their LPs. Last month, Ninepoint Partners LP, a Canadian investment management firm, suspended cash distribution for three of its private credit funds to cope with liquidity tightening. Other companies have completely exited. Last month, Fidelity International discontinued its direct lending activities in Europe, less than a year since the launch of its first fund. Managers themselves also admit that achieving a 12% ROI by 2023 will be difficult.

However, it can be certain that the current narrowing of spreads will not pose a survival threat to private credit. In the past two years, the returns have been strong, exceeding those of some private equity investments, and this trend may continue. At the same conference held in Berlin, Scott Kleinman, Co-President of Apollo Global Management, warned that most private equity firms in the industry will face a situation of 'decreased liquidity and decreased returns'.