SOURCE: Old Hill Partners

Old Hill Partners

February 01, 2016 09:35 ET

Old Hill Partners: Asset-Backed Lending Environment to Remain Attractive Despite Crosscurrents

DARIEN, CT--(Marketwired - February 01, 2016) - Customized asset-backed lending transactions will remain a compelling source of uncorrelated, risk-adjusted portfolio performance in 2016, according to a new research report from private lending specialist Old Hill Partners Inc.

In its 2016 Outlook, Old Hill Partners' CEO John Howe writes that despite a volatile start to the new year, the overall environment for private lending will remain characterized by issuer demand for capital, investor demand for yield, illiquidity in traded credit markets and further bank disintermediation.

Meanwhile, a sustained uptick in default rates is unlikely outside of energy-related issuers, Old Hill says, while the decline in energy prices will provide additional support to consumer balance sheets and thus wholesale ABL activities.

The research report also delves empirically into the impact of economic slowdowns on the value of various assets used as collateral, and the advantages of asset-backed transactions versus those backed by cash flows during periods of slower economic growth.

"Asset-backed lending transactions will continue offering lower-risk, more tangible avenues to earning an illiquidity premium," says Howe in the report. "Proper lending procedures, due diligence and monitoring can reduce issuer-specific risk, while customized floating-rate structures can generate high single-digit to mid-teen annual yields relatively unencumbered by interest rate risk."

Other key highlights from the 2016 Outlook:

  • Investors should not buy into the sky-is-falling rhetoric prevalent in January. How issues like China's soft landing and the dramatic decline in energy prices will ultimately impact the macroeconomic environment certainly bears watching, but a repeat of the 2008 financial crisis is very unlikely.
  • Global equity and energy markets are oversold and will stabilize over the short-term, while high-yield credit may take longer. Treasuries, meanwhile, are relatively overbought, and the path of least resistance for benchmark interest rates remains upward.
  • Dramatic market volatility has taken some of the wind out of the Fed's sails, and pushed additional tightening to the second half of the year. Hikes worth another 50 basis points are possible, but not guaranteed; the bifurcation of global monetary policy between the Fed on one hand and central banks of Europe, China and Japan on the other will expand.
  • Cash flow-based lenders will be at greater risk than asset-backed lenders. Default rates will remain manageable, but margin compression is coming from lower sales, not rises in in wages and raw materials costs - an unwelcome development for transactions collateralized by cash flow.

"The bottom line," writes Howe, "is that despite the myriad crosscurrents presently visible, we believe the environment for asset-backed transactions, when properly vetted, constructed and collateralized, will remain attractive in 2016."

About Old Hill Partners, Inc.

Darien, CT-based Old Hill Partners Inc., is an SEC-registered investment adviser with significant experience in asset-backed lending and alternative investment management. The firm offers customized lending products and services to middle market clients seeking creative funding structures for growth initiatives. Old Hill was founded in 1996 by John C. Howe. 

This document is for informational purposes and does not constitute a complete description of our investment services or performance. This document is in no way a solicitation or offer to sell securities or investment advisory services. Nothing in this document should be interpreted to state or imply that past results are an indication of future performance. The information contained herein is not complete, is subject to change, and is subject to, and qualified in its entirety. All information is furnished as of the date(s) shown or cited, and is subject to updating; no representation is made with respect to its accuracy, completeness or timeliness. This information is not intended to be, nor shall it be construed as, investment advice or a recommendation of any kind. This information is confidential, is intended only for intended recipients and their authorized agents and may not be distributed to any other person without prior written consent from Old Hill Partners, Inc.

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