Did the Russian invasion of Ukraine exacerbate some of the inflationary pressures that were already occurring?
TYLER LINDBLAD: Yes, inflation was already an issue prior to the Russian invasion of Ukraine. It’s certainly something we have been focused on since last October, which was well ahead of the [Federal Reserve] acknowledging that inflation was, in fact, not transient and that it was more problematic. Given the way that we view the geopolitical situation and its broader impacts on commodities and the food chain, [the invasion] is going to exacerbate that inflationary pressure.
As a private credit manager, we conduct granular analysis of our portfolio companies on an ongoing basis as the macroeconomic picture evolves. In this case, we have determined the level of direct exposure if they do business in Russia, as well as indirect exposure in their usage of commodities and other supply-chain issues. We have also conducted a similar granular analysis of companies in their exposure to inflationary pressures. We define it as high risk if they experience rising costs that can impact margins long term, medium risk if the impacts are temporary and low risk if there’s no impact.
Also, what I would highlight as good news [as we assess the inflation picture] is that consumer demand remains very strong. The U.S. economy continues to grow, and even if there is the risk of modest margin decline [by companies], that’s going to be absorbed by the equity, and it does not pose, from where we sit, any real risk from a debt or principal risk perspective.
What are some of key indicators you’re watching as we look ahead?
LINDBLAD: As interest rates rise and with the Fed now obviously being more hawkish, you’re starting to see that demand could potentially slow. We currently believe that the U.S. economy is still well positioned in 2022 and going into 2023. But clearly the risk of some sort of recession or stagflation has increased. The Fed has a new tightrope that they’re walking on, and [the risk] is going to make their efforts a little bit more difficult. It is certainly something that we’re paying attention to as well.
When rates increase, private credit is floating rate, which provides the benefit of increased interest income. How do you think about this as it relates to your borrowers?
LINDBLAD: Interest rates by historical standards are still very, very low. Even after the projected increases that we see coming, you’re still looking at LIBOR [London Interbank Offered Rate] or SOFR [Secured Overnight Financial Rate], [which are] potentially in the 2.5% to 3% range, which is still very attractive relative to historical standards.