Rising interest rates trigger a surge in special situations deals


Mukhtader Mohammed

The Reserve Bank of Australia has raised interest rates by a total of 250bps since April 2022 and signaled, like their global counterparts, potential further rate rises to control inflation. This has created uncertainty in equity markets and accelerated interest in alternative strategies such as private debt.

Private debt strategies comprise senior secured debt, mezzanine, subordinated debt, opportunistic debt (growth financing), stressed and distressed debt. Investors are often attracted to private debt due to its diversification benefits, cash-yields, inflation hedge properties, capital preservation due to seniority in the capital stack, and its relatively low correlation to other asset classes.

Globally, allocations to private credit have been increasing over the last two years. The Australian private debt market has witnessed a similar rise in demand, driven by the retreat of the major four banks following the GFC, and later, due to the tougher regulations following the 2017-2019 Royal Commission.

Mukhtader Mohammed, Managing Director at Arbitrium Capital commented, “As inflation has hit input prices, global logistics challenges continue to negatively impact the working capital positions of many corporates across several industries and sectors, affecting their creditworthiness. The prolonged period of historically low-interest rates has meant that companies have become accustomed to low costs of debt.”

Arbitrium Capital has over 70+ years of combined experience in distressed debt, funds management, and corporate turnarounds through numerous credit cycles. They are an active investor in mid-market Australian corporate credits that are secured by collateral and have strong underlying fundamentals but are unable to attract funding from traditional sources.

Mukhtader continued, “Rising interest rates could cause some corporates to breach interest ratio covenants, requiring them to address the impending breach either by deleveraging their balance sheet or refinancing their existing debt facilities. Rising input costs are also likely to affect debt to EBITDA credit metrics, causing dislocation in the primary and secondary credit markets. It is likely that companies in this position will require assistance. We currently have AUD231m in AuM and are raising a further AUD300m to meet the surge in our deal pipeline”

Clearway Capital Solutions is assisting Arbitrium Capital to engage with institutional, wholesale and sophisticated investors in Australia and New Zealand.

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