Conference Presentation, Panel, Fireside Chat
Credit Opportunities: Managing Shifting Tides
- The Federal Reserve is projected to maintain rates at zero through 2023 and intervene aggressively to stabilize markets or credit environments if significant pullbacks or credit widening occur due to future virus waves, effectively removing "left tail" risk and preventing defaults from spiraling out of control.
- Default rates are anticipated to rise to double-digit levels in the not too distant future, particularly in the energy sector, driven by capital constraints and uneven availability, with approximately $330 million in downgrade activity from investment grade to the Fallen Angel category expected.
- A vaccine is viewed as a potential game changer for the economy, though its distribution timing is uncertain; its eventual arrival is expected to unlock latent demand, generate a healthy GDP surge, and contribute to a more positive market outcome than a distressed one.
- Corporate fundamentals are expected to undergo fundamental repair over time to justify current valuations, with balance sheets remaining conservative initially, though a future distress cycle is predicted to emerge years later as markets normalize and corporate excesses return.
- The proliferation of cheap credit is expected to sustain "zombie companies" and delay necessary price discovery, potentially suppressing inflation in the near term as money supply remains unproductive before eventually flowing into productive capacity.
- Private credit markets are forecast to grow as a legitimate alternative to public markets, driven by structural tailwinds and the need for bespoke financing solutions for non-eligible or struggling borrowers, with specific growth expected in secondary private debt and preferred equity structures.
- Capital markets are expected to become increasingly discriminating over the next decade, shifting away from a "one size fits all" public market approach to select winners, while private equity dry powder is anticipated to be deployed to acquire bargains and provide tailored recapitalization.
- The consumer sector is projected to remain fairly resilient with positive sentiment supported by buoyant stock markets and fiscal stimulus, although segments with single-digit unemployment levels may face payment difficulties depending on future policy interventions.
- Despite strong policy support and corporate conservatism, the market faces ongoing fundamental risks in the energy sector where continued struggles may lead to further bankruptcies, and a full "new normal" for market stability and reporting has not yet been established.
- The overall crisis is assessed as having a higher likelihood of ending reasonably well rather than badly due to the combination of central bank backstops, fiscal involvement, and the eventual arrival of a vaccine, though "more dangerous behavior" from corporations may arise once the immediate crisis fades.