Panel, Conference Presentation
Credit Market Outlook
Milken InstituteMichael Milken, Mark Attanasio, George Hicks, Sir Michael Hintze, Joseph Naggar, Jim Zelter
- Private capital markets are expected to exceed $500 billion in fundraising this year, with potential for deployed capital to originate over a trillion dollars in private equity, while Apollo plans to leverage permanent capital vehicles to capitalize on future volatility.
- Credit market expectations include spread compression in Argentina with a current 400 basis point sovereign premium, a potential return of default rates to approximately 2% in 2018 despite a maturing credit cycle, and lower recovery rates accompanied by volatility due to bank loan capital structure shifts from 60% to 75%.
- Interest rate environments are projected to rise due to fiscal stimulus, tax changes, Chinese treasury sales, and the normalization of quantitative easing, prompting firms to maintain short or neutral durations, utilize floating rate products, or employ structured credit to mitigate risk.
- Geopolitical risks involving Russia, Iran, and the Straits of Hormuz or Red Sea could trigger SWIFT disconnections or banking instability, while sovereign defaults are anticipated to persist regularly over the next 10 years due to overleveraged government balance sheets.
- Specific market concerns include the possibility of consumer debt issues, such as subprime auto loans, escalating into significant problems via interest rate hikes, and European challenges regarding the euro in May 2017, whereas oil prices are deemed unlikely to fall to $10 per barrel due to production constraints.
- Strategic adjustments involve the application of the Dodd-Frank risk retention regulation effective December 24, 2016, to improve CLO warehouse returns by hundreds of basis points, a shift toward thematic investing in public high-yield bonds, and a preference for private transactions where issuers can name interest rates.
- Future market participants are expected to evolve into consortium-style private equity firms performing bank-like financing functions, while active management in covenant-like paper aims to maintain lower default rates and higher recovery rates through rigorous covenant work.
- Market sentiment reflects a preference for a "little bit of a correction" to allow disciplined firms to acquire assets, with expectations that covenant-light issuance could prove beneficial or allow for cheap purchases of defaulted paper if the credit cycle turns negatively.