TCW's Koch: Opportunities in New Private Credit Loans

TCW Group CEO Katie Koch says the firm sees buying opportunities in private credit and is looking to deploy capital into fresh loans and rescue financings. She characterized the current dislocation — “as the crowds go for the exit” — as a buy moment, signaling a more opportunistic allocation to private/debt and distressed credit strategies.

Analysis

Private credit and rescue financings benefit from a dislocation where forced sellers push mark-to-market price discovery ahead of fundamentals; that creates spread pick-up pockets of 150–400bps vs pre-shock private loan pricing for 6–18 month hold vintages, and selective rescue financings can generate IRRs in the mid-teens to low‑20s if deal selection is disciplined. Public proxies (BDCs, credit managers) will rerate as realized yields and deployment rates show through; expect headline NAV adjustments in the first 2–3 quarters followed by dispersion between scale managers with durable origination and smaller players that must chase price.

Tail risks cluster around liquidity shocks and a rapid macro reversal: a 300–600bps parallel widening in loan/high-yield spreads over 1–3 months would force covenant resets and accelerate defaults, turning apparent buying opportunities into capital calls and markdowns. Conversely, measured central bank liquidity injections or a swift reopening of bank lending could compress spreads by 100–200bps in 3–6 months and create near-term mark-to-market gains.

Tactically, this is a liquidity- and optionality-driven trade: prioritize managers and instruments that offer immediate carry, direct origination control, and downside protection (seniority, covenants, equity kickers). Size new deployments to allow patient hold windows (6–24 months) and avoid levering short-duration public credit exposures; use short-duration hedges to protect against a sudden flight to quality.

The consensus misses the operational and legal friction of rescue financings — diligence, intercreditor fights, and sponsor negotiations take time and reduce deployable velocity, meaning dry powder will not be fully competitive for the highest-return situations. That argues for active origination or partnerships rather than passive ETF exposure if your objective is capture of outsized rescue IRR.

Key Decisions for Investors

• Long ORCC and ARCC (2–4% portfolio each) — overweight scaled direct-lending BDCs with visible origination pipelines; target total return +15–25% over 12 months from carry plus spread compression. Risk: NAV markdowns if senior loan spreads widen >250bps; cut to 0.5% position if share price drops >12% while origination rate stalls.
• Buy BKLN or SRLN (senior loan ETFs) for 3–9 months to capture immediate carry and relative spread tightening; hedge duration by shorting LQD 0.5x notional to protect against a rapid risk-off move. Expected R/R: coupon capture ~5–8% annualized vs downside capped by hedge; unwind if senior loan OAS compresses <50bps.
• Initiate long BX or APO (credit managers with dry powder & restructuring platforms) 12–24 months — these managers capture fees and promote returns as rescue activity rises; target +20% IRR potential through fee/realization cycle. Hedge tail risk with HYG 3–6 month put spreads sized to limit portfolio drawdown to <8% on a 400bps HY widening.
• Allocate 1–3% of fund dry powder to direct rescue financings (single-deal basis) with strict covenants and equity warrants, deploy over next 6–12 months — pursue target gross IRR 15–25% with first-loss protections. Risk control: require minimum 2x projected covered interest protection and legal covenant enforcement terms; stop deploying if portfolio net loss rate tracking >150bps vs underwriting in a rolling 6-month window.