Panel, Conference Presentation
Credit Trends and Private Credit Evolution | Global Conference 2025
Milken InstituteEric Platt, Greg Braylovskiy, Anne-Marie Fink, Steve Kuppenheimer, Brad Rogoff, Kevin Sherlock
- Private credit giants such as Aries and Apollo are expected to drive terms and displace traditional banks as the economy slows and borrowing costs remain elevated.
- The economics team forecasts a base case of a very modest recession characterized by positive hard data but struggling soft data, leading to expected high-yield credit spreads averaging 450 basis points and potentially reaching 500 basis points.
- Default rates in the direct lending space are projected to reach at least 5% this year and high single-digit rates if a recession occurs, with cumulative defaults potentially hitting 12% to 15% over a three-year period, representing historically high levels.
- Recovery rates are anticipated to remain low, with first-lien leveraged loans recovering approximately 40 cents on the dollar, roughly 25 cents below the historical average.
- Market differentiation is expected to increase as weaker credits gap out or fail to execute, resulting in pricing that more closely reflects credit quality rather than uniform pricing across stronger deals.
- Liability Management Exercises (LMEs) are predicted to have likely peaked in the U.S. but may escalate in Europe, with over half of companies undergoing LMEs facing hard restructurings within the next two years.
- While LME activity may peak, the use of existing LME provisions is not expected to decline due to a looming maturity wall and higher refinancing needs, potentially driving creative restructuring models like discount secondary debt purchases over the next three years.
- New issuances currently underwritten are likely delayed until after Labor Day, while the market gap and lack of new supply are expected to facilitate asset absorption and market healing.
- Private credit is forecast to evolve toward greater tradability for large corporate credits ($2 billion to $7 billion) where natural quoting will occur, whereas smaller direct lending facilities are expected to remain illiquid.
- Retail access to private credit is expected to expand to meet demand for alternatives in retail systems, though this may eventually introduce asset-liability mismatches.
- The market is unlikely to experience a systemic unwind similar to the Lehman moment, with bank participation in private credit continuing through joint ventures to capture origination and banking services.
- Bank lines to private credit pools are not expected to unwind unless default rates exceed 50%, and implicit capital adequacy rules are predicted to discourage eight-times levered deals even if leverage guidelines become more flexible.
- Regulators are expected to remain nervous about exuberance while generally supporting the distribution of highly leveraged credits to non-bank vehicles to keep them off bank balance sheets.
- Significant return dispersion is anticipated between different direct lenders, contrasting with the lower dispersion seen in public high-yield markets, though the tail end of portfolios could face refinancing difficulties if assets are not marked down over a six-year period.
- High-yield and leveraged loan managers holding cash positions are expected to find opportunities becoming "juicier" as tight spreads evolve, and formalized marking with third-party services will likely develop alongside increased product liquidity via interval funds and ETFs.