Monday Market Minute | May 06, 2024

Private credit's peak-rate window is closing — fast

What Moved

Canadian private credit managers reported a surge of deal closings in late April and early May as the June rate cut became consensus. Lenders accelerated funding on transactions that had been in pipeline for weeks, locking in floating-rate yields at or near 5.00% base rates. Fund managers characterized this as the final origination window at peak rates — the highest lending rates most had seen in their careers.

Why It Matters

Loans originated at peak rates would generate elevated income for their full term, even as the BoC cut. For investors in private credit funds, the Q1–Q2 2024 vintage would likely produce the best risk-adjusted returns of the cycle. The key question was whether credit quality held — loans underwritten at 5% needed to perform at 4% and below.

Signal to Watch

Post-cut spread behavior would define the next chapter. If private credit spreads compressed in line with rate cuts, net yields could fall quickly. If spreads held — reflecting ongoing risk premiums — private credit would remain the standout allocation.

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