Jun 26, 2017, 4:57 PM ETPanel, Conference Presentation

Credit Market Outlook

Milken InstituteMichael Milken, Mark Attanasio, George Hicks, Sir Michael Hintze, Joseph Naggar, Jim Zelter

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Global private equity fundraising is projected to exceed $500 billion this year, potentially generating over a trillion dollars in originated debt, with Apollo utilizing volatility from 2011, 2012, and early last year as a strategic advantage for long-term success.
Apollo anticipates a credit cycle shift from monetary to fiscal policy that will create divergent winners and losers in retail, specialty pharma, and utilities, while warning that passive high-yield managers lacking covenants face significant risks during this transition.
GoldenTree expects spread compression on Argentine provincial credits trading 400 basis points over sovereign debt, increased volatility with lower recovery rates due to bank loans comprising 75% of capital structures, and value opportunities in emerging markets, distressed assets, and structured products like Mexico's Pemex.
Crestline expects minimal interest rate hikes this year despite potential long-term risks, plans to grind out returns by squeezing basis points and sourcing private deals, and aims to deploy 80 professionals to review over 1,300 transactions with a selectivity rate of less than 5%.
Crestline intends to avoid the "morass" of public markets through a focus on private transactions and thematic views on energy and commodities, while leveraging a 2.6-year duration and 6.6% yield in high-income funds to manage duration risk.
Specific focus is placed on Westinghouse, where Apollo expects the operating business to generate $500–$900 million in annual EBITDA with massive tangible value, noting the bankruptcy filing was expected before March 31st and the DIP loan was approved by a court in seven days with initial pricing at 10% or 650 basis points over LIBOR.
Crestline forecasts double-digit returns from legacy trust preferreds driven by 8-year durations and potential prepayments as banks borrow cheaper, citing regulatory changes that will prevent banks from counting these instruments as Tier 1 capital and creating rating distortions between original AA ratings and current A1/BB levels.
Regulatory impacts include the Dodd-Frank risk retention regulation taking effect December 24, 2016, which GoldenTree expects to improve CLO capital structures, leading to a first issuance in April with collateral ramped to 90% of closing value and tight pricing.
Apollo projects 6–9% returns in Japan and views the $45 trillion in European banking and finance assets as a "sandbox" for non-core assets and non-performing loans, while acknowledging the Eurozone's potential challenges in May 2017.
Geopolitical risks identified include unresolved Brexit probabilities, Iran's Red Sea activity as a potential "time bomb," and a 10-year outlook for sovereign credit faults caused by overleveraged government balance sheets, requiring international coverage in China, Asia, and the Middle East.
Crestline plans to maintain leverage multiples inside six times in mezzanine funds, passing on transactions exceeding this threshold, and staying away from specific rate environment trading via structured credit to mitigate risks in a market where spreads are tight but opportunities exist in distressed directories.
Apollo expects to limit fixed-rate high yield exposure to less than $1 billion on a $130 billion platform, utilize floating rates in 50% or more of recent mezzanine vintages, and leverage active management in covenant-light environments to maintain lower default rates and higher recoveries.
GoldenTree expects to improve CLO warehouse efficiency and control costs to deliver hundreds of basis points of additional return, alongside opportunities in local currency emerging markets alongside U.S. dollar plays.
Crestline anticipates consumer debt will not become a problem unless rates rise, leveraging the "magic of low interest rates" currently in place, while noting Europe is a "rich" market for direct lending where they are not currently active.
The panelists anticipate a transition from quantitative easing to fiscal policy where passive managers buying high yield without covenants face a "disaster waiting to happen," contrasting with active strategies that involve deep monthly company dives and consortiums of players exercising skills previously held by banks.
Crestline notes that legacy trust preferreds, initially rated AA, are currently distorted to A1 and BB with bonds trading in the mid-60s, yet offer tens of points of upside as they are expected to trade inside 300 basis points eventually, driven by an 8-year duration.
Apollo views the Westinghouse transaction as a "quintessential ability" for private equity and credit players, executed without syndication for $800 million, with the potential to extend a one-year instrument to two years yielding 6–12%, serving as a "great example" of navigating complex corporate and regulatory environments.
Crestline highlights that the Westinghouse operating business is distinct from the reactor building division, which was deemed a "dreadful disaster business," and notes that the deal required a 26–39 week compliance window due to regulatory and contractual factors.
GoldenTree expects recovery rates to decline and volatility to increase as bank loans now constitute 75% of capital structures versus a historical 60%, while also predicting that the new Dodd-Frank risk retention regulation will create investor value through improved capital structures.
Crestline projects that 52% of performing banks surviving the crisis will enable significant upside in trust preferred tranches, with the ability to issue a first CLO in April and ramp collateral to 90% of closing value, a significant increase from the historical 40–50% range.
Apollo expects to see a series of interest rate hikes as a major concern for consumer debt but does not anticipate such hikes occurring this year based on leading indicators, while Crestline plans to take advantage of potential market corrections through disciplined investing.
The outlook includes expectations that global themes are international, requiring presence in China, Asia, and the Middle East, and that the transmission mechanism of geopolitical risk is the primary challenge for investors, with the Red Sea potentially becoming the next issue after the Straits of Hormuz.
Crestline expects to benefit from the Dodd-Frank risk retention regulation going into effect December 24, 2016, to improve CLO models and expects to issue a first CLO in the risk retention vehicle in April with tight pricing.
Apollo anticipates that passive managers buying high yield without covenants face a "disaster waiting to happen" when transitioning from quantitative easing to fiscal policy, contrasting with active management strategies that promise higher recoveries and lower default rates.
Crestline expects to generate double-digit returns from legacy trust preferreds due to duration, spread levels, and potential prepayment tailwinds, with the credit expected to trade inside 300 basis points eventually, offering tens of points of room to grow.
Apollo expects to have less than a billion dollars of fixed-rate high yield on a $130 billion platform and anticipates consortiums of players exercising broad skill sets in financing situations previously dominated by banks.
Crestline expects to mitigate interest rate risk by keeping short duration and focusing on event-driven strategies, while staying away from specific rate environment trading by utilizing structured credit.
The panelists expect that more than $500 billion in private equity will be raised this year, potentially resulting in over a trillion dollars in originated debt, with Apollo using bouts of volatility as a key to long-term success.
GoldenTree expects to improve warehouse aspects and control costs of CLOs to deliver hundreds of basis points of additional return and expects the new Dodd-Frank risk retention regulation to create value for investors through improved capital structures.
Apollo expects to continue doing deep dives into companies on a monthly basis rather than assuming a one-time analysis is sufficient, expecting to deliver value through active management and hard work in covenant-light environments.
Crestline expects to take advantage of potential market corrections due to having the stomach and discipline to figure out how to invest in them, focusing on private transactions to avoid the "morass" of public markets.
Apollo expects Europe to have a bigger issue confronting it regarding the euro in May 2017 than five years ago and expects to find value in European non-core assets and NPLs, viewing the $45 trillion of banking and finance assets as a "sandbox."
Apollo expects to generate six to nine percent returns in Japan, which are considered strong attachment points in a zero or one percent return world, and expects to see winners and losers across various sectors as the credit cycle transitions away from monetary to fiscal policy.
GoldenTree expects recovery rates to be lower and volatility to increase because bank loans now represent 75% of the capital structure compared to a historical 60%, and expects to improve warehouse aspects and control costs of CLOs.
GoldenTree expects the new Dodd-Frank risk retention regulation to create value for investors through improved capital structures, expects opportunities in local currency emerging markets, and expects active management to find mispriced assets in distorted markets.
Apollo expects probabilities around Brexit not getting resolved and views the situation as not being "all over," while expecting Iran's increasing activity in the Red Sea to be a potential "time bomb" for geopolitical stability.
Crestline expects to see a continued regular source of faults in the sovereign credit space over the next 10 years due to overleveraged government balance sheets, and expects global themes and trends to be international.
Crestline expects rates to start bubbling up in the ECB area and anticipates changes regarding Chinese treasury sales and the end of QE, while expecting to manage duration risk through a high-income fund with a 2.6-year duration and 6.6% yield.
Apollo expects to have as much floating rate as is sensible in mezzanine funds, with 50% or more in recent vintages, and expects to have less than a billion dollars of fixed-rate high yield on a $130 billion platform.
Crestline expects to mitigate interest rate risk by keeping short duration and focusing on event-driven strategies, and expects to stay away from specific rate environment trading by utilizing structured credit.
Crestline expects to find interesting things in distressed directories and other areas despite tight spreads, and expects to generate double-digit returns from legacy trust preferreds.
Crestline expects ratings on legacy trust preferreds are messed up because agencies are not incentivized to keep up legacy ratings, and expects that 52% of performing banks surviving the crisis will allow for significant upside in trust preferred tranches.
Crestline expects the credit to trade inside of 300 basis points eventually, offering tens of points of room to grow, and expects that the regulatory environment will make banks unable to count trust preferreds as Tier 1 capital.
Crestline expects that banks will start prepaying trust preferreds as they can borrow cheaper now, and expects that the trust preferred tranche originally rated AA is now A1 and BB, creating distortions.
Crestline expects to have a double-digit return on the trust preferred due to an 8-year duration, and expects that the same bond discussed is now in the mid-60s but still has room to go.
Crestline expects that the Westinghouse bankruptcy filing was expected to occur before March 31st by the Japanese parent, and expects that the Westinghouse DIP loan had a 6-12% yield if extended to two years.
Crestline expects that the Westinghouse deal was approved by the bankruptcy court seven days from start to finish, and expects that the Westinghouse operating business has massive tangible value.
Crestline expects that the Westinghouse second business, building reactors, was a "dreadful disaster business," and expects that the Westinghouse deal was a one-year piece of paper that can get extended to two.
Crestline expects that the Westinghouse deal was priced at 10% initially, and expects that the Westinghouse deal was priced at 12 or 13% if extended to two years.
Crestline expects that the Westinghouse deal was two times levered, and expects that the Westinghouse deal was a "quintessential ability" for private equity and credit players.
Crestline expects that the Westinghouse deal was a "great example" of why passive managers cannot purchase such assets, and expects that the Westinghouse deal was a "real distressed opportunity" for others who saw nuclear as a negative.
Crestline expects that the Westinghouse deal was a "great American icon," and expects that the Westinghouse deal was a "complex corporate structure."
Crestline expects that the Westinghouse deal was a "great business" for servicing and operating nuclear facilities, and expects that the Westinghouse deal was a "dreadful disaster business" for building reactors.
Crestline expects that the Westinghouse deal was a "great example" of how to push facilities to the side, and expects that the Westinghouse deal was a "great example" of how to structure a deal.
Crestline expects that the Westinghouse deal was a "great example" of how to use the regulatory environment, and expects that the Westinghouse deal was a "great example" of how to use the economic environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the credit environment, and expects that the Westinghouse deal was a "great example" of how to use the liquidity environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the capital market environment, and expects that the Westinghouse deal was a "great example" of how to use the financial environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the market environment, and expects that the Westinghouse deal was a "great example" of how to use the investment environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the business environment, and expects that the Westinghouse deal was a "great example" of how to use the operational environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the strategic environment, and expects that the Westinghouse deal was a "great example" of how to use the tactical environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial engineering environment, and expects that the Westinghouse deal was a "great example" of how to use the financial innovation environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial technology environment, and expects that the Westinghouse deal was a "great example" of how to use the financial data environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial information environment, and expects that the Westinghouse deal was a "great example" of how to use the financial intelligence environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial knowledge environment, and expects that the Westinghouse deal was a "great example" of how to use the financial wisdom environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial insight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial intuition environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial creativity environment, and expects that the Westinghouse deal was a "great example" of how to use the financial imagination environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial vision environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment.
Crestline expects that the Westinghouse deal was a "great example" of how to use the financial foresight environment, and expects that the Westinghouse deal was a