Panel, Conference Presentation
Credit Market Outlook
Milken InstituteMichael Milken, Richard Byrne, Scott Minerd, Joseph Naggar, David Warren, James Zelter, Mike Milken, Rich Byrne
- Global credit market opportunities are expected to expand as non-bank lenders assume assets from banks due to regulations like the Volcker Rule and Basel, though liquidity during market spikes remains fragile despite creating idiosyncratic trading chances.
- A credit cycle decline driven by a loss of approximately $250 billion from falling oil prices is projected to run "long in the tooth" over a two-to-three-year period of low borrowing costs before a recession likely emerges in two to two years.
- Investors are anticipated to seek credit to add yield as secular re-regulation alters the market environment, with credit alpha opportunities currently scarce but expected to resume within a three-to-five-year horizon.
- High-yield bond trading activity is projected to annualize near $2 trillion, while special situations credit worth $150 billion trading at spreads above 10% is expected to offer specific alpha amidst stressed credits that may either default or compress to normalized levels.
- Approximately $85 billion in fallen angels are expected to enter the high-yield market, potentially impacting the coal industry which risks a transition from investment grade to default, while dip financing in stressed club deals may yield mid-teens returns.
- Structured credit markets, including CLOs and CMBS, are forecast to grow larger than the traditional corporate debt market, with ETFs and loans expanding but active managers maintaining an outperformance edge over benchmark-focused peers who are underperforming.
- U.S. commercial real estate is identified as being in a late cycle with significant price appreciation, prompting expectations for $100 billion or more of commercial MBS loans maturing annually this year and next, creating opportunities for funds to provide LIBOR plus 1,400 loans with 12-to-18-month maturities.
- Relative value in quasi-sovereign debt is expected to tighten to approximately 200 basis points relative to Brazil's sovereign, while institutional investors may exploit market boundaries to trade bonds bought at 60 and sold at 90 within a month.
- Fund structures are trending toward lock-ups lasting four to seven years to allow for strategic toggling, supported by trillions of dollars of corporate liquidity that should generate further credit market opportunities as companies lock in rates.