Conference Presentation, Panel
Credit Outlook | Global Conference 2025
Milken InstituteMichael Milken, Lee Kruter, Drew McKnight, Purnima Puri, James Reynolds, Christian Stracke
- Private credit returns are projected to remain attractive across the liquidity spectrum due to bank retrenchment following the 2023 regional bank crisis, driving a structural shift from "originate and hold" to "originate and distribute" models that creates absorption opportunities for asset managers.
- Bank lending is forecast to continue declining as a share of GDP and in nominal terms for regional banks in 2023 and 2024, while growth areas in loan-on-loans, NAV lines, and subscription facilities will expand into a hybrid lending world.
- High-yield spreads currently at 350 basis points and loan market spreads at 500 basis points are deemed unsustainable, with high-yield spreads trading in the 75th percentile implying market pressure as sellers outnumber buyers.
- Approximately $2 trillion of debt is expected to mature over the next four to five years, generating demand for junior capital as borrowers perceive traditional debt structures as overly levered, potentially driving private credit non-investment grade growth to match private equity expansion rates.
- Europe is expected to offer significant value compared to the U.S. and a stronger short-term growth backdrop over the next six to nine months due to lower energy prices and favorable ECB rate paths, prompting increased firm deployment in the region.
- Latin America is identified as a favored region under the current administration with potential outperformance in trade war scenarios, featuring specific interest in local markets, semi-liquids, and asset-based credit structures in the Gulf and Saudi Arabia.
- Activity is anticipated to grow in Southeast Asia and Australia, while Japan is expected to activate regarding interesting corporate transactions, with private credit becoming increasingly global and mainstream driven by retail access vehicles and infrastructure funding needs.
- Infrastructure investment in data centers and power solutions in the U.S. and Europe, including tier two markets, is expected to remain active, with specific strategies involving the acquisition of mobile gas turbines and leasing to hyperscalers.
- Asset-based credit portfolios in consumer finance are expected to remain active with stress testing against draconian scenarios, such as a 2x to 3x Global Financial Crisis, while non-QM or non-agency mortgage spreads at the 30th percentile offer recession-type yields.
- CLO and mortgage returns are projected to withstand peak default rates exceeding three times current levels, while the duration of asset-based credit portfolios may shorten meaningfully if credit events occur to facilitate de-risking.
- Investment portfolios are expected to focus on higher quality businesses with liquidity options like public equities or revolving credit, and firms are adopting daily forward-looking analysis to react to current information rather than relying solely on historical data.
- Private equity secondaries and capital solutions are anticipated to become a major opportunity set as prospects for a "magical year of exits and IPOs" fade, with bridges to IPOs or business sales expected to provide value crystallization opportunities.
- Pension funds in the liquid space are expected to achieve required 7% to 8% returns without excessive risk assuming Fed funds remain above 3%, while direct lending is projected to show incremental premium yields as recovery rates gain relevance over default rates.
- Consolidation within the private credit industry is expected to continue favoring larger platforms capable of handling large origination funnels, while private credit teams must build robust infrastructure to manage potential increases in restructuring calls.
- Deregulation in the banking system is expected to free up capital on bank balance sheets, allowing more distressed asset transactions, while a "great pivot" in investment-grade financing is expected to drive energy transition and digitalization projects attracting insurance capital.
- Base rates are likely to decrease over time despite remaining elevated, creating an exciting yield environment, while currency moves may drive capital shifts such as European pension funds reassessing unhedged USD assets.
- Fortress plans to resolve 26 properties from a Capital One portfolio, some at par and others at deep discounts without foreclosure, while GoldenTree will maintain caution on real estate data centers due to rapid technological shifts and client sophistication.
- Investment-grade credit growth is expected to be fueled by the sale of billions in tax-free annuities seeking 5% to 6% tax-free compounding yields, and financial technology knowledge is expected to spread globally creating opportunities outside the U.S.
- Fortress expects the opportunity in Europe to be very large over the next three to four years, with direct lending showing an incremental premium yield and the need to handle restructuring calls increasing from two to three per week during a real default cycle.