This summer Bond Capital went back to school on interest rates.
A 400bps increase in interest rates would hurt borrowers, including the government. A move of this magnitude is highly unlikely if you believe the bond market. It is pricing in an eventual 200-plus basis point increase in the Bank of Canada’s key lending rate before rates level off.



According to CNBC, the bond market did not follow the script many had expected this past summer, which would have seen interest rates rising on the back of a booming economy. Instead, COVID continues, yields on longer dated treasuries are falling, and that can be a warning on the economy.

On the one hand strategists point to a number of technical reasons for the surprise drop in yields. On the other hand, they also point out that inflation may force the Fed / BOC to move too far too fast to tighten policy, slowing the economy as a result. Amongst central bankers, it appears to us that Tiff Macklem is vying for most hawkish status with his New Zealand counterpart Governor Adrian Orr at the RBNZ and his Norwegian counterpart Governor Oystein Olsen at the NOK. All are worth watching over the next six months for interest rate guidance as Jay Powell at the US Fed continues to appear dovish.

Getting Paid to Borrow?
While waves of COVID continue to rock the economy, liquidity in the financial system is strong. Governments continue to buoy assets with quantitative easing and the economy with low interest rates. The banking system maintains strong reserves at the moment, and now that we are learning to live with COVID the banks are re-entering the market. The market for debt capital is so accommodative that one could argue it is better than free.



It has rarely been such a good time to access liquidity for your business. A business should :

1. review your banking agreements and look to term out your operating line and other existing loans with longer term capital;
2. devise a 6 month emergency liquidity plan that you can call on if needed; and
3. focus on strengthening your balance sheet by asking your CFO to build a plan that will maximize your fixed charge coverage ratio.

Fourthly, call a friend like Bond Capital who is always happy to talk about balance sheet management and balance sheet strategy.

About Bond Capital
Bond Capital is an award-winning private credit fund. As a direct lender, Bond Capital provides advice and money across the entire risk curve. Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation. Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.

Creativity, Inc.
Overcoming the unseen forces that stand in the way of true inspiration.

By Ed Catmull and Amy Wallace, Transworld Publishers Ltd., 2014

Saying you are creative doesn’t make you creative. Creativity, Inc. is a book for managers about how to build a creative culture. As Pixar co-founder and president Ed Catmull writes, “An expression of the ideas that I believe make the best in us possible.” An interesting easy reading book about creativity in business and leadership.

Inspired by Walt Disney, Ed Catmull dreamed of making the first computer-animated movie. Despite his interests in animation, he pursued studies in math, physics, and computer science at the University of Utah. Many decades before computer animation existed, an innovative Catmull began developing the programming to do 2D and 3D computer graphics. During this time, he met George Lucas and was recruited to work at Lucasfilm becoming vice president of Industrial Light and Magic’s computer graphics division, until 1986 when Steve Jobs bought it and co-founded Pixar with John Lasseter and Ed Catmull. Starting with Toy Story, followed by 30 Academy Awards, the rest is movie history with Pixar itself becoming an object creativity lesson. In the book, Catmull reveals the ideals and techniques that have made Pixar so widely admired—and so profitable.

The unique environment that Catmull and his colleagues built at Pixar, based on philosophies that protect the creative process and defy convention, such as:

• Give a good idea to a mediocre team, and they will screw it up. But give a mediocre idea to a great team, and they will either fix it or come up with something better.
• If you don’t strive to uncover what is unseen and understand its nature, you will be ill prepared to lead.
• It’s not the manager’s job to prevent risks. It’s the manager’s job to make it safe for others to take them.
• The cost of preventing errors is often far greater than the cost of fixing them.
• A company’s communication structure should not mirror its organizational structure. Everybody should be able to talk to anybody.
• Do not assume that general agreement will lead to change—it takes substantial energy to move a group, even when all are on board.

Catmull shows how Pixar’s success recipe results from connecting the specific little things they do to the big goal that drives everyone in the company: making films that make them feel proud of one another. A lot of these things can be replicated in any organization.

“The most practical and deep book ever written by a practitioner on the topic of innovation.”—Prof. Gary P. Pisano, Harvard Business School

What is Private Credit

Private credit is the provision of loans (credit) in private markets from a non-bank party where the debt is not issued or traded on the public markets.  To understand the basis of it, one must appreciate the nature of private markets and the nature of the credit being provided in those markets. Private markets are an alternative to and different from public markets.  Private markets are highly reliant on high touch private investors such as venture capital, private equity and private debt, and offer unique investment opportunities not available in public markets.

Public markets, under the efficient-market hypothesis (EMH), are markets in which asset prices reflect all available information.  To initially determine a price, a securities issuer retains an investment bank to solicit opinions on assets prices (through underwriting, analysts, and investors), arriving at a value for an asset through information sharing. That security is then tradable, provided that information is continuously shared.  The required administration and costs are significant for the initial and ongoing disclosures such that the size of the issuance must be substantial enough that it can bear the costs of public listing, allowing for liquidity, price discovery and efficient market pricing.

Private markets are inherently less efficient as they often apply an auction like process for price discovery, they are less liquid, and they may not have the fulsome continuous disclosures and continuous repricing provided by the public and EMH.  Private markets offer investments that are not widely available to the public, with longer term investment time horizons and unique structures.  A common theme in private investing is that underwriting and governance tend to be led by one or very few lead investors and these investors are high touch and integral to the investments monitoring. This is in contrast to the passive role most investors take in public market investing. Assets financed in private markets can include real assets (roads, commodities, infrastructure, real estate etc.), companies that wish to remain private, companies that do not have the size or scope to be public, or companies that may hold specific geographic or business models that by size or type don’t lend themselves to public markets.  Private market investments have liquidity constraints which benefit long term capital providers, however, trading these assets can be a lengthy and costly process. This illiquidity promotes long term investment thinking over short time horizons which may favour certain asset classes, strategies, or attract different managers to certain companies.  Lastly, private market investment strategies are often specialized.  They can be event driven by targeting the growth, reflation and transformation that result from changes in the economic cycle, balance sheet, specific assets by geography and size, or specific stages in a company’s lifespan from early-stage high growth, to long term no growth infrastructure.

Credit (from Latin credit, “(he/she/it) believes”) is the trust which allows one party (the investor) to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), but promises either to repay or return those resources (or other materials of equal value) at a later date.^[1]  In 2006, Bond first published its white paper on mezzanine finance which breaks out credit stratums and payment streams by priority on cash flows and or assets.  Where a payment stream has a current component, we call this a debt (or credit attribute) and where it is deferred, we define this as an equity attribute.  Where a payment is more certain and defined, such as an interest payment, the return is more debt-like. On the other hand, the more variable a payment is the more equity-like.  Seniority of cash flows and asset security can vary tremendously by stratum and silo and various combinations or permutations thereof can be used to customize a debt or equity security into a hybrid. Private credit funds can occupy a single type or many as shown in the chart below.

Private credit is a term used to describe non-bank groups that provide credit in private markets. Traditional banking strategy has been to provide standardized loans at low cost and in high volumes.  Banks’ access to central bank capital and low-cost deposits often enables them to be the low-cost provider in private markets.   However, to manage the mismatch in duration between current deposits and overnight borrowing from central banks and longer-term loans banks make, banks are highly regulated.  These regulations (i.e. Basel III, Dodd-Frank) have restricted the traditional bank in its ability to service certain credits. Moreover, traditional banks use credit models and technology necessary to manufacture
generic loans at the lowest cost.  This allows private credit providers to target niche credit transactions at higher costs.

Supplying private credit is attractive to investors searching for improved yield and enhanced fixed income in today’s low yield public markets. With its added flexibility, private credit is taking substantial market share from traditional banks. As private credit providers specialize in specific structures, geographies, industries, sizes and other custom features, they are increasingly competitive with banks. While private credit continues to evolve, it remains highly reliant on higher touch, unique and custom solutions to generate higher returns than public markets at the expense of immediate liquidity.

About Bond Capital

Bond Capital is an award-winning private credit fund.  As a direct lender, Bond Capital provides advice and money across the entire risk curve.  Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation.  Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.      

During last month’s webinar, Bond Capital Private Credit together with its friends from Goldman Sachs and Deloitte discussed the current market for private capital, deal flow and trends. Below are the main takeaways:

K-Shaped Recovery
COVID-19 has divided the economy into two subsets. On the higher end of the spectrum is the performing “Market Darling”, who continued to show growth despite troubled times – think zoom, grocery and pets. On the other hand, at the lower end of the spectrum are companies who are struggling to stay afloat or whose business models need transformation – think concerts, airlines, restaurants and cinemas. The divergence of the economic subsets resembles the two arms of the letter “K”. For companies on the upward arm of the “K” there is ample capital. On the downward portion of the “K” capital availability is dear except for oddly, large unrated bonds.

Liquidity is King
Pre-COVID Bond Capital advised company CFOs to keep six months of liquidity to weather through the up-and-downs of the business cycle. In 2021, Bond Capital is recommending that CFOs find ways to keep up to twelve months of liquidity.  This is because there are still many uncertainties around counter party risk (bad debts / supply chain disruption / bank facility reduction / bank demand rights) and the path of the virus. Some ways CFOs can create these additional months of liquidity are by swapping ABL facilities into term loans to create availability and or seeking an increased revolver facility and or reducing the cash collection cycle and or identifying alternative sources of capital like private debt. You should also know that Bank loan loss provisions are being reversed since there were fewer insolvencies in 2020 compared with 2019. This makes it a very good time to talk to a trusted expert about your safety capital needs.

Equilibrium between Flexibility and Cost
Pre-COVID, Company CFOs were cost-sensitive and would often choose lower cost over added flexibility when structuring their debt financing. In 2021, CFOs should consider if flexibility is now more important than cost. To illustrate, the benefit of negotiating smaller scheduled payments and a longer duration is increased liquidity to help weather uncertain economic recovery scenarios. Furthermore, a smaller payment schedule can be augmented with the right to make additional voluntary payments along the way in the event the CFO discovers later that things are not as bad as one first thought.

About Bond Capital
Bond Capital is an award-winning private credit fund.  As a direct lender, Bond Capital provides advice and money across the entire risk curve.  Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation.  Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.

This year, for the first time since World War II, the United States will owe more than its economy can produce¹. This is because in response to the COVID-19 crisis, the US Federal Reserve (the “Fed”) lowered its policy rate back to near zero and introduced liquidity through a series of credit facilities, such the Money Market Mutual Fund Liquidity Facility, the Primary Dealer Credit Facility (bond issuance) and the Commercial Paper Funding Facility (short-term “line of credit” draw down funding), to support the flow of insolvency prevention credit to households and businesses. Subsequently, the Fed launched the Secondary Market Corporate Credit Facility so it could also act as a liquidity backstop by buying certain issued corporate bonds in the secondary market, adopting a “whatever-it-takes” stance inclusive of investment grade right down to junk issuances.

Within three months of its expanded mandate, the Fed added $3.0 trillion to its balance sheet, compared with ~$1.3 trillion in Q4 2008.


Despite recent positive results from clinical trials of COVID-19 vaccines, the US Center for Disease Control and Prevention explains that there may not be enough doses for all adults until late 2021 and young children may need to wait until more studies are completed.  Therefore, a return to pre-pandemic GDP output will likely be uneven and slow. The downward force on interest rates will persist for a very long period of time as we described in our prior publication. Stephen Poloz, former Governor of the Bank of Canada said more recently, “current low interest rates may last a generation”

The markets research firm, FACTSET, in its November 6, 2020 report forecast an earnings decline for the S&P 500 companies of 14.8% in 2020. The Fed “risk-free” liquidity (put) was so massive and swift that despite the decline in earnings, the yield on investment grade bonds dropped from 4.88% in March 2020 to 1.44% today. The High Yield and Leveraged Loan markets also showed similar “risk-free” yield movements. A trendline between leverage and yield (grey line) demonstrates the risk/reward profile in the more liquid fixed income market, however, middle market private credit has not followed.


The Fed’s liquidity programs are not geared for or available to mid market and smaller private companies creating a yield gap of up to 500 bps when compared to the trendline above. Moreover, well-meaning commercial bank regulation (Basel III) has changed capital requirements reducing both bank credit supply to the small and middle market companies and competition in this market niche.

Investors who can accept private credits’ lower liquidity can enjoy meaningful yield premia over investment grade bonds for similar levels of leverage. Accessing private credit is more difficult than hitting “buy” on your trading screen.  The private credit market is fragmented and there are a limited number of private credit fund managers in the space who have experience navigating multiple major swings in economic and credit cycles.

¹Federal Reserve Bank of San Francisco, November 2020

About Bond Capital

Bond Capital is an award-winning private credit fund.  As a direct lender, Bond Capital provides advice and money across the entire risk curve.  Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation.  Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.