Private Credit Market Shake-Up

2023 has been an interesting year in Private Credit:

• The year began with lenders offering rates reflecting an over-abundance of capital on balance sheets from European and American banks seeking ‘yield’ at a time when global interest rates were at historic lows.
• With many lenders committed to the second-tier development sector to meet distribution targets, the hangover effects of Covid lockdowns, increased labour and material costs began to bite. Lenders highly exposed to development started to feel a cash-crunch.
• The year progressed with continued rate rises and slowing land and site sales, leading to further cash-flow issues for many development financiers.
• Since the GFC there has been a meteoric rise in the volume of lenders in the Australian private credit sector and we have seen some aggressive participants in the market beginning to fail through poor credit and portfolio management practices.

Not all is doom and gloom in non-bank space though, the market remains largely liquid.

What matters now is that the market, on a rate for risk basis, has normalised. The cost of capital is once again determined by portfolio performance and strong credit policies.

Traditional non-bank lenders with the most direct line to investors, who can maintain slim margins through strongly performing loan books are once again the better option, as they can undercut the risk price of warehouse-funded lenders. Semper is one such lender.

2024 will likely see a tougher property market for new builds, quality issues and increasing business failures in development chain. Sticky inflation will continue the increasing prevalence of mortgage stress and foreclosures.

This will continue to provide opportunities for Semper assisting in business turnaround and property portfolio deleveraging.