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RESEARCH, ANALYSIS AND OPINIONS

NEWS

Private Credit: Old Hill Lending Outlook 2019

Most of the events we anticipated in last year’s Outlook, including four interest rate hikes, an equity market correction and a partial yield curve inversion, have come to pass. Waning support from tax cuts and concerns about a late-cycle combination of rising inflation, tightening policy, and slower growth have caused significant stock market valuation adjustments and put the U.S. Federal Reserve’s hawkish stance in place since 2015 on the defensive. Consequently, risk of a policy mistake in 2019 is now relatively low; neither normalization of interest rates nor the pace of its balance sheet unwind will continue on autopilot. We expect at most one additional hike in 2019 before the Fed pauses for what could be an extended period. Accordingly, moderate expansion will continue this year, albeit at a slower pace.

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Canceling Out the Noise

Private market investments have distinct advantages during periods of high volatility. In Old Hill's case, asset-based lending transactions can result in greater return consistency over time, as returns are calculated based on the performance of the underlying debt and are not dependent on the whims of public markets.

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Keeping Covenants

Lenders required strong covenants following the 2009 financial crisis, but a tremendous demand for yield and an extraordinary amount of dry powder accumulated within direct lending funds has translated into a willingness to loosen those standards in order to put capital to work. As sponsor-backed, covenant-light loans skyrocket, Old Hill is content to stay in our lane – the prudent generation of attractive, risk-adjusted returns through structured asset-based small balance debt transactions.

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