Panel, Conference Presentation
Credit Outlook | Milken Institute Global Conference 2024
- BlackRock projects a five-year outlook where private credit allocation increases within institutional portfolios driven by diversification and yield premiums, amidst a higher-for-longer interest rate environment expected to create significant corporate dispersion.
- The firm anticipates fixed income and equity returns will be attractive on a risk-adjusted basis over the next five years, with high single-digit to low double-digit yields available on income products net of defaults despite a flatter yield curve.
- Strategic Value Partners forecasts a multi-year challenging period due to a maturity wall involving $600 billion in annual debt due in 2025, 2026, and 2027, requiring $500 billion in adventurous financing and $300 billion in distressed work.
- Blue Owl Capital aims to maintain a low loss rate of approximately 7 basis points even if default rates rise substantially, leveraging recovery capabilities of less than 40% of enterprise value to ensure enduring premium returns.
- J.P. Morgan Partners expects private credit growth over the next several years to eventually match the size of the liquid market at roughly $2.8 trillion, with recovery rates at least 100% higher than those in liquid markets.
- BlackRock predicts a decade-long expansion driven by Basel III regulation, extending beyond corporate direct lending into real estate, infrastructure, and ABS while noting a risk of increased repeat default issuers due to insufficient structure in public markets.
- Strategic Value Partners plans to source debt directly from banks to secure control of companies and act as the largest stockholder in scenarios where sponsors have exited, while warning of significant operational stress hidden beneath the surface in US and European tech and software sectors.
- Blue Owl Capital forecasts that structured risk transfers, such as CLOs and car loans, will drive market growth over the next couple of years by allowing asset managers to complement fixed income portfolios with tranched assets from bank balance sheets.
- The panel collectively identifies risks from U.S. deficit creep, increasing geopolitical volatility affecting labor and goods flows, and a market failure to price geopolitical events accurately.
- J.P. Morgan Partners anticipates that liquid markets will reopen for refinancing, allowing private credit to dominate the B-minus and lower market segments that remain inaccessible to liquid lenders.
- Strategic Value Partners expects derivative geopolitical risks to increase competitive local policies, thereby impacting inflation levels and altering risk premium volatility across the overall market.
- Blue Owl Capital observes a shift from short-term banking money to permanent capital pools, with 92% of its business derived from permanent capital to support long-duration solutions.
- J.P. Morgan Partners highlights the operational challenge that scaling processes is as difficult as shrinking them, expressing concern over maintaining control and efficacy while transforming a growing investment team into a permanent business.