Health care’s looming debt maturity wall presents a significant opportunity for private credit issuers on the near horizon as $165 billion of debt maturities will come due by 2030, according to Bloomberg.
At the same time, the private credit market has grown to $1.6 trillion and is expected to grow to $2.8 trillion by 2028, according to Preqin.
The rise of the private credit market asset class has emerged due to several factors which include the rapid rise of interest rates in the past two years, tightening of banking regulations and the looming debt maturity wall.
It’s important to note, the private credit asset class differs from traditional syndicated lending where organizations seek out funding directly from the lender. In traditional syndicated lending, an organization would seek out lending from a bank, which would then seek out institutional lenders to buy parcels of the total loan. Private credit additionally differs from private equity in that private credit is a source of capital by loan versus taking ownership in an organization.
What makes private credit attractive to health care organizations in need of capital?
Private credit offers debt financing to organizations that may be ineligible for bank loans or have more flexible terms when it comes to duration, timing of payments and certain covenant metrics. With a high interest rate environment and the debt maturity wall looming for health care organizations, private credit may be a consideration for some to help refinance at slightly lower rates than the open market federal funds rate.
Noteworthy, some of the largest traditional banking institutions have recognized the loss of possible debt-market share as a result of private credit offerings and have set up their own direct lending private credit strategies to capitalize on this market opportunity.
Some investors see value in returns for private credit
Some organizations that used private credit direct lending as a source of capital have gained financial strength and stability, which has translated into positive returns for lenders. These types of returns are due to lenders offering floating interest rates attached to the private credit agreements. Given interest rates have risen sharply in the past two years, investors were able to mitigate interest rate risk for generating cash flow returns attached to the loaned capital to health care organizations.
The health care ecosystem is no stranger to debt financing as a source of capital. In the era of easy money and near zero interest rates, the health care ecosystem had historical record levels of debt raised and in 2023, organizations entered into $23 billion of debt financing arrangements with private creditors, according to Pitchbook.
What’s to come?
Health care organizations and investors should expect to see an expansion of private credit deals in 2024 given the higher interest rate environment, a looming debt maturity wall and emerging market dynamics like the private credit market. Health care leaders should take note and evaluate if this is the type of financial arrangement they can benefit from, how it might strengthen the financial stability of their balance sheet and how it can generate stronger returns.
Michael Haas
Michael Haas is a technology management consulting manager in RSM US LLP’s health care industry practice. In 2022, he was selected for the firm’s Industry Eminence Program as a senior analyst covering the health care industry, working alongside the firm’s chief economist and other program participants to analyze the trends and themes affecting the nonprofit and education industry and shaping middle market businesses. Michael is based out of RSM’s New York City office.
Matt Wolf
Matt Wolf is a financial consulting director in RSM’s health care practice. In 2018, he was selected for the firm’s cutting-edge Industry Eminence Program as a senior analyst covering health care, working alongside the firm’s chief economist and other program participants to analyze trends and themes affecting the industry and shaping middle market businesses.
In addition, Matt leads the firm’s health care valuation team and serves as the practice leader for RSM’s Nashville, Tenn. region health care practice. He is also an active member of the firm’s Family First employee network group.
Danny Schmidt
Danny Schmidt is a senior manager in the assurance practice and a health care senior analyst for RSM US LLP. As a member of the Industry Eminence program, Danny works alongside the firm’s chief economist and his fellow senior analysts to understand, forecast and communicate economic, business and technology trends affecting middle market businesses.
