Conference Presentation, Panel
Credit Market Outlook
Milken InstituteMichael Milken, Ilfryn Carstairs, Pierre de Chillaz, Juan Delgado-Moreira, Lawrence Golub, Robert Petty, Mike Milken
- The U.S. small and medium business market is projected to be fully open by 1983, while the U.S. middle market remains the world's third-largest economy and is expected to continue as a vibrant, fast-growing sector.
- U.S. private equity-backed companies are forecast to outperform U.S. GDP and public companies by approximately 400 basis points annually.
- U.S. banks are not expected to increase middle market activity despite regulatory relaxation due to infrastructural, team, and compensation constraints.
- European banks are anticipated to retreat slower than U.S. counterparts due to system size, though a gradual shift toward non-bank financing will persist, whereas the European earnings market may see double-digit EBITDA growth and rating repricing.
- European distressed opportunities are expected to remain viable for specific cases with earnings improvement potential, such as the Greek telco sector.
- The European credit market is expected to continue developing alongside a shift toward non-bank financing, though growth may proceed on a sideways path after market sorting.
- Central banks may begin unwinding balance sheets over the next two years, likely causing higher rates and volatility that create defensive positioning opportunities.
- U.S. economic indicators do not currently signal intrinsic company weakness, though credit risk warning signs are expected to persist.
- A future market cycle is anticipated to reverse current conditions characterized by low covenant protection and high leverage levels.
- Golub Capital targets annual returns of 11% to 12% over the next five years for core funds utilizing 2-to-1 leverage based on the forward LIBOR curve.
- Returns of 15% are not considered feasible in the current market environment for either Golub Capital or other asset managers.
- Private credit fundraising is expected to reach a run rate of $100 billion to $120 billion, with distressed and mezzanine strategies driving exponential growth while direct lending and senior debt lead fundraising percentages.
- Non-bank lending is expected to expand significantly in Asia, mirroring the U.S. and European shifts observed five to seven years ago, with direct lending and company builds becoming dominant.
- Asian credit demand is projected to continue growing, contrasting with Europe's sideways trajectory, as non-bank capital replaces bank lending for consumers and small businesses.
- Asian creditor rights are improving, with China and India updating bankruptcy codes to resemble Chapter 11, twenty years after the Asian financial crisis.
- India presents a $150 billion to $180 billion opportunity for restructuring and financing following proactive regulatory handling of non-performing loans.
- Investors in Asia are expected to construct risk-adjusted, dollarized portfolios yielding 200 to 300 basis points more than developed markets with comparable risk profiles, potentially achieving double-digit returns, though scaling to a trillion dollars is not expected in the near term.