The conflicting approach between fiscal and monetary policy in the current economic environment presents both risks and opportunities for investors in terms of corporate debt, distressed assets, and over-leveraged businesses.
The rising interest rates pose risks for companies with significant floating rate debt, particularly in the private equity-backed sector, while creating opportunities for distressed debt investors in the form of potentially higher yields and structural protection.
Deep dives
The Tug-of-War Between Fiscal and Monetary Policy
The podcast discusses the conflicting approach between fiscal and monetary policy in the current economic environment. The Biden administration has implemented significant stimulative spending plans, leading to inflationary pressures. Meanwhile, the Federal Reserve aims to control inflation by rapidly raising interest rates. The outcome is uncertain, but it is reasonable to expect a scenario with the avoidance of a deep recession while interest rates remain elevated for an extended period. This has implications for investors, presenting both risks and opportunities in terms of corporate debt, distressed assets, and over-leveraged businesses.
Concerns About Companies with Floating Rate Debt
The podcast highlights concerns about companies with significant floating rate debt, primarily in the private equity-backed sector. With the rise in interest rates, these companies are facing higher borrowing costs, which can lead to liquidity issues and potential default risks. The impact of the rising rates is particularly challenging for over-leveraged businesses that were financed under the assumption of stable rates. This creates opportunities for distressed debt investors while posing risks for businesses that may default on their debt obligations.
Opportunities in Credit Markets Today
The podcast explores the emerging opportunities in credit markets, particularly in the context of the current environment. Limited capital availability for new deals can benefit managers who can fund with certainty of execution. Favorable terms and greater investor protections are becoming more prevalent, shifting power from borrowers to lenders. Allocating across different asset classes, such as high-yield bonds and senior loans, can exploit relative value differences. Additionally, opportunities arise when comparing ratings across asset classes, such as collateralized loan obligations (CLOs), which offer diversification, structural protection, and potentially higher yields.
Insights on Collateralized Loan Obligations (CLOs)
The podcast delves into the evolution of collateralized loan obligations (CLOs) over the past decade and focuses on their role in the current market. CLO managers have shifted from managing loan portfolios to actively managing and trading assets in a rapidly rising interest rate environment. The growing concern for credit quality in the loan market, coupled with the historically low interest rate regime, has created investment opportunities in high-quality bank loans trading at a discount. The podcast emphasizes the importance of investing with managers experienced in credit cycles and highlights the value of the call and refinancing options available to CLL equity investors in navigating potential market dislocations.
Armen Panossian (Head of Performing Credit), Danielle Poli (Assistant Portfolio Manager, Global Credit), and Megan Messina (Head of CLO Capital Markets) discuss topics from the 2Q2023 Performing Credit Quarterly. They consider the current tug-of war between fiscal and monetary policy, opportunities in credit, and what many investors are getting wrong about today’s CLO market.
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