Conference Presentation, Panel
Evolving Opportunities in Capital Markets (updated)
Milken InstituteMark Attanasio, Colleen Campbell, Lowell Kraff, Soren Reynertson, Justin Slatky, Cristina Alesci
- Soren Reinerson predicts a current bond leveraged loan bubble characterized by record issuance volumes and yields, with half of new loans expected to be value-transfer repricings rather than genuine funding.
- Reinerson warns that the near-zero level of maintenance covenants, the lowest since tracking began per Moody's, removes early warning signs and erodes protections on asset sales and affiliate transactions.
- Forecasts include distressed company managers becoming "fully out of the money" yet retaining control, potentially leading to aggressive "Hail Mary" strategies, while a lack of covenants may cause firms to prioritize cash management over product development, shrinking enterprise value.
- Justin Slacky anticipates the current credit cycle will extend through 2014, driven by artificially inflated credit markets and Fed stimulus, with 70% of new high-yield issuance being refinancing that pushes out maturities and lowers interest costs.
- Slacky notes high-yield leverage has hovered around four times and expects the current market to differ from the 2007 bubble, though he identifies significant risks in US municipal debt crises, citing specific defaults in Detroit and Jefferson County, Alabama.
- Municipal bond pricing is expected not to reflect new risks, particularly for general revenue obligations, due to uncertain political willingness to tax and a lack of case law for Chapter 9 reorganizations.
- Marc Antonacio observes that while interest coverage is currently higher than in 2006-2007, rising interest rates could trigger credit issues for companies with floating rate debt in their capital structures.
- Anticipated fund flows show a sharp increase into investment-grade mutual funds while high-yield flows abate, driven by expectations that interest rates will remain low, though Antonacio notes his high-yield public portfolios have an average cash flow of $1 billion per company.
- Colleen Campbell predicts that new capital requirements and liquidity rules will make banks uncompetitive, forcing companies to carry more cash or seek just-in-time financing, while European bond markets are expected to develop significantly over the next few years.
- Massive financing requirements in oil sands, shale gas, and LNG sectors are forecast to gravitate toward the bond market, supported by commitments from end users like British Petroleum and Japanese institutions.
- Infrastructure funds are expected to participate in the leverage finance space during project construction phases, with future private equity funding likely to shift toward mutual fund products as pension funds face underfunding gaps.
- Justin Slacky warns that pension funds face real risks from attempts to make up return misses, predicting that many will need to reset return expectations as 8% growth becomes impossible for entities like Illinois, which holds a $90 billion pension delta.
- Conservative clients, including state pension funds and corporate plans, are showing increased interest in leveraging underlying assets, creating a demand for credit-oriented vehicles from major buyout players like Apollo, KKR, and Blackstone.
- Concerns exist that competition among managers could lead to excesses if clients set up races, though institutional investors are increasingly outsourcing asset allocation across high yield, bank loans, convertibles, and mezzanine debt.
- Private equity firms are moving toward equity strategies and fixed income firms are shifting to equity due to the search for yield, while Colleen Campbell anticipates consolidation where firms managing less than several billion dollars will struggle to compete.
- Market liquidity is expected to face challenges for small $110 million bond issues due to a capital vacuum from non-deposit takers, though Business Development Companies (BDCs) are filling the void for middle-market sponsored portfolio companies.
- Non-sponsored, midwestern family-owned businesses may face difficulties due to a lack of access to major capital providers, while credit-driven hedge funds are investing in equities and commodities to find returns unavailable in fixed-income markets.
- Slacky expresses concern that liquidity issues will be exacerbated during downturns due to ETF growth in bond and bank loan markets, though corporate cash holdings currently provide a cushion against bumps in the road.
- Reinerson forecasts that if the predicted credit bubble bursts, it will do so louder and noisier, resulting in reduced enterprise value as the absence of investor protections impacts distressed negotiations.