Monday Market Minute | Oct 17, 2022

Private credit spreads widen to decade highs as bank retrenchment accelerates and borrower demand surges

What Moved

Canadian private credit origination spreads reached their widest levels in over a decade as the Big Six banks tightened lending standards in response to the BoC's aggressive rate hikes and growing recession concerns. Borrowers who would have easily qualified for bank financing in 2021 found themselves redirected to private lenders, willing to pay premium spreads for capital certainty and speed. The combination of a 3.25% base rate and 400-700 basis points of spread meant private credit managers were originating loans at all-in yields of 7-10% on senior-secured positions.

Why It Matters

The spread widening was the clearest indicator yet that 2022 was becoming a generational vintage for private credit. Unlike the post-GFC period, when low base rates capped total returns, the current environment combined high base rates with wide spreads — a double tailwind that produced returns historically associated with equity investments but with debt's structural protections. For HNW investors, the window to access these yields would remain open only as long as the BoC maintained elevated rates.

Signal to Watch

Bank of Canada Senior Loan Officer Survey — tightening lending conditions among Canadian banks would confirm the structural shift of borrower demand toward private lenders.

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