Panel, Conference Presentation
Credit Market Outlook
Milken InstituteMichael Milken, Ilfryn Carstairs, Sir Michael Hintze, David Miller, Joseph Naggar, Jim Zelter
- The leverage finance market has grown 48% over the past six years with the loan market up 51%, while equity checks average 40% (up from 30% pre-crisis), and default ratios in retail and energy sectors remain range-bound between 1.8% and 2.8%, currently at 2%.
- Over $1 trillion of global private equity dry powder is anticipated for deployment within the next 5 to 7 years, potentially generating $3.6 trillion in purchasing power and $2.5 to $2.6 trillion in originated debt, which could virtually double debt market activity.
- Covenant light structures are projected to persist, having increased from under 30% of the market in 2007 to 75% last year, with spreads on fully covenanted deals trading 85 to 90 basis points higher annually than covenant light deals.
- The leverage loan market is expected to outpace growth in the high yield market, while the market is viewed as compelling despite expectations for volatility to return and potential liquidity challenges as short-end rates rise dramatically for unhedged non-investment grade companies.
- A consensus view anticipates four additional interest rate hikes between the time of speaking and the end of the year, prompting CFOs and issuers to borrow now to avoid potential treasury spikes, with Apollo expecting to navigate portfolios toward a floating-rate heavy stance.
- Passive investing is not expected to perform well over the next 3 to 5 years, whereas active structured credit and event-driven strategies are forecast to regain favor, driven by regulatory changes expected to cause CLO issuance to skyrocket in 2017 and 2018.
- GoldenTree anticipates CLO issuance surges in 2017 and 2018 due to regulatory changes, which may lead to spread widening from increased supply and a reversion of the Buenos Aires local currency bond to approximately 150 over the Sovereign.
- Distressed market opportunities are identified in Spain and Italy where supply and demand imbalances may create opportunities despite distant economic distress events, while India is expected to become a proper distressed market following bankruptcy reforms and forced restructuring of its non-performing loan problem.
- Apollo aims to grow investor fund commitments and permanent capital over the next five years, targeting returns of 6% to 7% across the spectrum, with specific prospects for 6% to 8% with lower volatility or 8% to 9% via direct origination over time.
- Significant capacity exists to absorb capital across seven or eight major investing themes, each capable of receiving over $1 billion, with Sir Michael Henze expecting to deliver net returns of 7% to 8% and the Athene-Apollo relationship targeting a 3.5 percentage point asset-liability spread.
- A tipping point is anticipated that may lead to recession or distress cycle opportunities, where passive investing and regulations are expected to drive dispersion between performers, resulting in higher defaults and lower recoveries for companies lacking technology investment.
- Specific market conditions include Argentina showing solid growth near 3% with positive political dynamics, offering attractive risk-adjusted returns on floating-rate off-benchmark investments, while Altice is expected to present restructuring opportunities due to a 95% debt-to-capital ratio.
- Vardy anticipates acquiring blue-chip lending businesses at attractive prices forced by regulation, and GoldenTree views a spread environment inside 700 with issuance exceeding 10% of the high-yield universe as generally unfavorable for triple C investments.