Conference Presentation, Panel
Credit Markets: What's Next?
Milken InstituteMike Milken, David Warren, Steve Tannenbaum, Mark Rowan, Josh Friedman, Mark Antonazio, Richard Kanner
- Richard Kanner forecasts the U.S. unemployment rate will remain stable for the next couple of years, preventing a spike in speculative grade defaults, while noting that declining sensitivity between unemployment and defaults suggests falling average default rates.
- Kanner characterizes the current corporate sector as safer than in previous cycles due to the absence of accounting irregularities and significant leveraging transactions, and observes that recent mergers are funded by strong equity rather than high leverage.
- Mark Rowan asserts that the "easy" phase of credit markets has ended, replaced by a "hard" market requiring complex origination, and warns that open-ended mutual funds and ETFs acting as marginal buyers create structural risks by trading without analyzing covenants.
- Rowan anticipates a future credit crisis where a "bubble" will eventually burst, predicting that interest rates rising above 1% or 100 basis points will negatively impact interest coverage for deals originated at low LIBOR rates, particularly as caps on bank debt are no longer negotiated.
- Steve Tannenbaum expects high-yield default rates to rise to approximately 5% or higher as the credit cycle concludes, anticipating better entry points as "bad numbers" emerge and capital structures prove unsound.
- Tannenbaum expresses a low preference for the current high-yield market given the spread and expected default rate, identifying leveraged loans and certain asset-backed securities as superior opportunities, provided investors utilize locked-up vehicles to mitigate liquidity mismatches.
- Tannenbaum suggests Collateralized Loan Obligations (CLOs) are superior to open-ended funds for owning bank debt due to their fixed structure and locked-up nature, predicting a "healthy CLO arbitrage" opportunity if prices drop to around 90 cents.
- Mark Antonazio projects the high-yield market will return between 6% and 7% this year, viewing the current period of low defaults and a U-shaped recovery as favorable for credit investments despite low growth and interest rates.
- Josh Friedman predicts significant yield compression and returns approaching 20% for residential housing assets as visibility improves and fewer borrowers remain underwater, while foreseeing a resurgence in the U.S. distressed market within the next five years, potentially in the back half of that period.
- Friedman notes the 2012-2013 "beta trade" is largely over but expects specific structured finance niches, including model line insurance and non-property asset-backed securities, to outperform triple C corporate bonds.
- David Warren envisions the next decade as a "golden era" for credit investors driven by Dodd-Frank and Basel requirements reducing bank balance sheets, creating direct opportunities to participate in origination and capture high returns.
- Warren expects a growing number of "one-off" co-investment opportunities over the next five years and anticipates a strategic focus on direct credit creation and longer lockups to match the illiquidity of higher-return assets.
- Mark Antonazio predicts the European market offers a long-term opportunity of at least a decade for developing non-performing loan infrastructure and origination, driven by bank balance sheet shrinkage and the sale of problem credits.
- Antonazio also forecasts credit market expansion in maturing economies like China, aiming to build markets for small and medium-sized enterprises that currently lack capital access.
- Richard Kanner notes Moody's expansion will focus on Asia, the Middle East, and Sub-Saharan Africa, though uncertainty remains regarding market acceptance of opinion businesses and the influence of evolving public policy in those regions.
- Mark Rowan predicts alternative investment firms will face increased regulatory scrutiny as they grow in size and systemic importance, while also anticipating the European market will struggle with hostility toward private capital, leading to a more cooperative model with the banking system.