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Five Things to Know about the Middle Market

In the spectrum of debt assets, the general public are typically familiar with corporate bonds, loans, U.S. treasury bonds, and even high yield bonds. There are however many more debt instruments that do not enjoy the same familiarity outside of institutions; for example, U.S. middle market loans. What is it about middle market debt that differentiates it from the more traditional, better-known choices?

1. Revenue growth among middle market companies is robust

The United States middle market, as a sector, has consistently outpaced large corporations in terms of revenue growth.

Middle market companies grew their revenues by 8.4% over the past 12 months. At that rate, a company doubles in size in fewer than nine years. Middle market companies have bested S&P 500 companies in revenue growth each quarter for the past five years.

 

Source: National Center for the Middle Market – Historical Data

2. Middle market companies’ debt is backed by collateral

Debt transactions in middle market companies are very commonly secured by the assets of the borrower, adding a layer of protection for the lender.

Only 0.01% of middle market debt transactions in Q1 2018 were not secured by collateral compared to 13.7% of large corporation transactions left unsecured.

Source:S&P Global – High-End Middle 

 Market Lending Review 1Q 2018

3. Recovery rates on middle market debt are higher than broadly syndicated

In debt transactions, the safety of the principal is of extremely high priority. Middle market debt has demonstrated higher recovery rates than the broadly syndicated debt of larger corporations.

The average recovery rate on middle market senior debt is 79.3%, compared to 68% in the broadly syndicated market. Since 1983, 64.5% of defaults on middle market loans are fully restructured or repaid with no economic loss.

Source: Moody’s 2018 Annual

Default Study

4. Middle market senior loans have generated superior returns

The average yield on middle market loans is consistently higher than that of traded leveraged loans.

Compared to liquid leveraged loans, middle market senior loans have generated spread premiums of 285 basis points.

5. Middle market loans can offer a hedge against inflation and rising interest rates

Because most middle market loans are structured with a floating interest rate, are less likely to  suffer capital losses as interest rates continue to rise.

A 15-year bond yielding 2% and trading at par would decline 12% from a 1% rise in rates.

Middle market companies are enjoying a very strong start to 2018. The RSM US Middle Market Business Index (MMBI), designed to accurately reflect business conditions in the U.S. middle market, registered an all-time high in Q1 of 2018. With a default environment expected to remain benign and recent tax reform, viewed as a net positive for most middle market companies, we believe middle market debt is particularly well positioned for success.


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