Conference Presentation, Panel, Fireside Chat
Credit Markets: New Risks, New Game Plan | Global Conference 2024
- The U.S. economy is projected to undergo a gradual slowdown and normalize its growth path without a recession in the medium term, though the professional forecasting community may continue to face surprises regarding economic resilience and slow reactions to interest rate hikes.
- Investment grade corporate issuance is forecast to total between $1.4 trillion and $1.5 trillion for the year, with issuers expected to bring forward issuance in anticipation of the upcoming election and to adjust capital structures for the high-rate environment.
- Private credit is anticipated to experience significant growth over the next four years, potentially reaching $2.8 trillion, though portfolio deployment is expected to slow over the next 12 months as the sector remains in early development stages for real estate, infrastructure, and Asset-Backed Finance (ABF).
- Institutional investors are expected to continue migrating capital from public credit to private assets to capture illiquidity premiums, while banks restructure financing rules to shift capital from their balance sheets to private or public investors.
- Commercial real estate, particularly office space, faces material losses as maturity walls approach due to a mismatch between capital costs and returns, while private credit ecosystem design is expected to reduce systemic risk by preventing rapid capital withdrawal.
- Credit risks are expected to intensify for lower-quality issuers and highly leveraged companies, with delinquency rates for 2022-2023 vintage unsecured loans projected to exceed 2007-2008 levels despite lower unemployment, and recovery rates potentially falling significantly below historical averages.
- BDC portfolios holding software technology are expected to face stress as recurring revenue loans transition to EBITDA-based covenants, while interest coverage ratios in BDC portfolios face increasing pressure that could evolve into a broader credit issue.
- Liquidity premiums in public high-yield markets are expected to compress by 50 to 100 basis points due to reduced liquidity needs and new trading protocols, while competitive covenants in private credit may lead to spread compression and covenant degradation driven by dry powder supply.
- Sponsors are expected to dual-track transactions to secure optimal execution, price, or flexibility, while diversified fixed income with a higher quality tilt is projected to deliver expected returns of 6% to 9% with relatively low fundamental credit risk.
- Systematic investing in corporate bonds is expected to grow significantly as investors utilize new liquidity tools for portfolio-level transactions, and ABF is identified as a key growth space for credit over the next couple of years.
- The deployment of private credit and the size of the market will depend on financing availability and asset performance during the credit cycle, with aggressive capital structures potentially tested by a "soft landing" and higher-for-longer rates.
- Floating rate borrowers are expected to see a reduction in the all-in cost of capital as short-term rates and spreads tighten, whereas investors are anticipated to continue de-risking fully funded pension plans and utilizing retail money in the current environment.