Conference Presentation, Fireside Chat, Panel
Credit Market and Private Debt Predictions for 2018
Milken InstituteJames Mackintosh, John Francis Barry, Maria Cantillon, Nigel Walder, Adam Wheeler, Alex Vascovich
- European high yield spreads are predicted to rise slightly from a recent low of 2%.
- Inflows into private debt are expected to continue accelerating, driven by commercial bank retrenchment due to regulatory balance sheet costs.
- Increased capital competition in private debt markets may compel providers to offer more flexible terms, such as covenant-light structures.
- Public markets are projected to remain the lowest-cost financing option, sustaining a liquidity premium for private lenders.
- Covenants in the majority of mid-market direct lending transactions (EBITDA of 10 to 40 euros) are expected to be retained despite pushback from the private equity community.
- Borrowers and private equity firms are increasingly challenging loan document definitions regarding EBITDAR and pro-forma adjustments.
- Lenders who have omitted covenants face inevitable negative outcomes and significant workout time as the credit cycle turns.
- The syndicated market is forecast to experience a "painful end" resulting from an influx of non-discerning new players.
- Capital is anticipated to continue flowing into private credit, offering risk-adjusted opportunities even with compressed spreads.
- Managers expect to deliver a 10% net return to investors, representing a 30% reduction from the 14.8% gross return achieved over the last 12 years.
- The European private debt market is projected to grow further, driven by European pension funds discovering the asset class on a relative value basis.
- Private debt investors are becoming more sophisticated, yielding better relative value returns compared to four years ago.
- Private debt managers are expected to maintain continuous capital deployment without the fallow periods typical of private equity funds.
- A recession is forecast to begin in 18 months.
- Most of the online lending book is expected to repay before the onset of the predicted recession, securing the lender's position.
- Nationalism-driven political risks requiring physical substance in every European country could negatively impact the European asset management industry.
- Political risks, including Brexit and geopolitical tensions, are viewed as short-lived and quickly priced into markets.
- Deal flow originating from the UK has decreased following the Brexit vote, though opportunities in the broader European market are offsetting this decline.
- Caution is expressed regarding the political landscape in South Korea, leading to the decision not to pursue specific opportunities in that region.
- The US middle market is anticipated to remain the primary job creator, supported by political campaigns focused on employment.
- Two-thirds of surveyed middle-market companies prioritize regulatory reduction over tax cuts or stimulus, indicating a favorable regulatory environment.