Credit Exchange with Lisa Lee

“There are lots of mixed signals out there,” says Chris Wright, president of Crescent Capital Group, on the latest episode of Credit Exchange with Lisa Lee. That’s creating uncertainty. “When we think about the investment environment, we approach it with caution.”On the bankruptcies of First Brands and Tricolor, Wright doesn’t see them as canaries in the coalmine or a tipping point in the economy. But they do show that due diligence matters. There were audit flags, governance failures, and opaque structures that sounded warning bells. “We have to be diligent in our work,” Wright notes.Crescent, a global credit manager with almost $50bn in AUM, recently launched a CLO ETF and has plans to introduce other product, Wright adds. While too early to say whether Crescent will start a European CLO management business, it’s “certainly something that is on our drawing board and we’re spending a lot of time thinking about and assessing,”, Wright says.

Bret Leas, co-head of asset-backed finance at Apollo Global Management, shares insights on the dynamic world of private credit. He foresees the market exceeding $40 trillion, spotlighting Europe as a significant opportunity due to its underinvested insurance and narrow banking systems. Leas emphasizes the importance of diligence, warning against rising leverage and weak documentation in both private and public markets. He also discusses the growing war for talent and the innovative uses of asset-based finance that keep emerging in today’s economy.

“The idea that default rates will go up over time is not particularly difficult to get to,” says Jake Pollack, head of global credit financing and North America credit trading at JPMorgan, on the latest Credit Exchange podcast with Lisa Lee. “The markets have been very sanguine, and it won’t be surprising if we see more defaults in the coming months and even years.”Corporate America is doing well, despite some headline-grabbing bankruptcies recently. But Pollack notes that spreads are very tight, which means there’s a lot of capital chasing opportunities. As recent bouts of volatility have demonstrated, it doesn’t take a lot for spreads to widen out.Pollack also tips trading in private credit to increase, especially if the definition of private credit is widened to incorporate private investment grade debt and structured notes. But trading in traditional direct lending loans is less likely to take off.This means that there will be certain areas where that illiquidity premium goes away as the market looks more like its public counterparts. There will be other areas that are not widely held, that can probably keep the spread premium because it’s simply much less tradable, Pollack says.

“Underneath is a lot of volatility. Companies are struggling. You’re seeing really wide dispersion,” says Greg Peters, co-chief investment officer at PGIM Fixed Income, on the latest episode of Credit Exchange with Lisa Lee. Companies, both public and private, are defaulting at a higher rate than you would expect given the macro backdrop.Investors have been too quick to dismiss the possibility of a return in inflation. Peters pegs the probability of the US economy overheating at 25%, and higher than the probability of a recession. The US has fiscal stimulus coming through, likely a more easy Fed, and together with deregulation and some other factors, there’s the real risk of overheating next year, he says. He adds there’s also a 10% probability of a productivity boost from AI.Markets are also struggling with the near-term effects versus the long-term, Peters notes. The case of France is what happens to a sovereign that’s overindebted, where the political system is called into question. “This is very much a canary in a coal mine,” he says.

“It’s a huge differentiator” to have dedicated and experienced personnel to deal with struggling borrowers, says Tim Lyne, CEO of private credit specialist Antares Capital, in the latest Credit Exchange podcast with Lisa Lee. Recent entrants, funds raised in the past five years, often do not.On the M&A front, Lyne doesn’t expect to see a great volume of M&A transactions this year, or indeed in the first quarter of next year. That’s because Antares’ volume on the new business side is average: “if it was going to be great, we would be seeing some of those deals come in the shop already,” he says.Private credit could have financed the $20bn of debt for Electronic Arts, but it would have been a stretch. But that will not necessarily be true for much longer, he observes. “If I fast-forward 3-5 years from now, I think $20[bn] will not be challenging.”There are also too many players, Lyne says, which is compressing fees. With more than $85bn in AUM, Antares has scale, and Lyne says the biggest private credit lenders will continue to get bigger. But for the players in the industry that are not of scale, “it’s going to be incredibly challenging for them to continue to grow over the next five years.”

“Existing investors are probably too long the dollar. They enjoy a very good ride. Valuations are expensive. It makes sense to take profit,” says Grégoire Pesques, CIO, global fixed income at Europe’s largest asset manager Amundi, in the latest Credit Exchange podcast with Lisa Lee.The US, UK, many Eurozone countries, Japan – all have been spending profusely, causing deficits to be a big issue almost everywhere. Describing the fiscal and macro landscape, Pesques details where Amundi, with €2.2 trillion in AUM, is investing. He is buying UK Gilts because the market hasn’t priced in the possibility that growth may slow, and the Bank of England then cuts interest rates.Germany is prepared to turn on the fiscal spending taps, yet will stay one of the safest countries in terms of debt-to-GDP ratios. “There will be a premium for the government that keeps some sort of orthodoxy and has a very strong balance sheet,” says Pesques. There are also pockets of emerging markets that are great investments right now, he adds.There is a big need for diversification away from the dollar and away from Treasuries. But it will take “ages”, he notes, and the rebalancing will be progressive.“It’s always better for a risk-adjusted return to have more diversification in your portfolio,” says Pesques.

“Long-term, I think the game is over from a buyout perspective. I think private capital has won that game,” says Randy Schwimmer, vice-chairman and chief investment strategist at Churchill Asset Management, a leading middle market financing and investment firm with $55 billion in AUM.In the latest episode of the Credit Exchange podcast with Lisa Lee, Schwimmer notes 90% of the leveraged buyouts completed this year were financing by private credit in the traditional middle market space. As for the large-cap deals, the bigger loans that can be multi-billions of dollars in size – while there, too, the majority of LBOs were done by private credit firms, banks have found a way to stay relevant by undertaking refinancings and repricings. Banks also still have significant market share in straight corporate lending and for certain specialist sectors.“It’s a healthy ecosystem right now, where everybody is playing a role,” Schwimmer says.Speaking to banks’ aspirations to create a secondary trading market for private credit loans, that will be difficult, especially in the middle market, Schwimmer predicts. He adds that many have tried. “Illiquidity will still mean something in the traditional middle market,” he says.

“One interesting canary in the coal mine that has not been materially recognised, is the health of the consumer,” says Dan Zwirn, CEO, CIO and co-founder of Arena Investors, on the latest episode of Credit Exchange with Lisa Lee.Zwirn has observed delinquencies in unsecured obligations increase materially, as well as stress in areas like the sub-prime auto market. Original issue consumer lenders are selling off ‘charge-off paper’, which is distressed unsecured debt, at material and elevated amounts.Financial assets are providing the proper signals and indicating trouble in the economy, he says.“What we have seen since the GFC is that the innovation around the thwarting of price discovery has never been more rampant,” he said. “An example of how that touches the consumer is BNPL (buy now, pay later), where certain types of buying don’t necessarily hit consumer credit scores.”But policymakers do have a lot of tools in the toolkit to delay problems, which can stave off a traditional economic crisis. As a result, barring any extraordinary geopolitical events, the market is instead likely to experience a “slow grinding decline,” similar to what Japan experienced with its struggling economy.

“Volatility is now certain. Before, we feared chaos because no-one knew what was coming. Now, it’s priced in” – Alan Schrager, senior partner at Oak Hill Advisors, in the latest episode of Credit Exchange with Lisa Lee.Focus on Treasury markets, advises Schrager. “As a professional investor, what we look at are actually the Treasury markets. They’re sending this signal that there’s this risk inherent,” he says, speaking to the recent rise in long-term sovereign yields of developed countries. “You always think of the risk premium of the US Treasury to be zero. And now that's really what's changed is that there is a risk premium in there.”Schrager also discusses how market volatility, macro risk, and private credit are shaping today’s investment landscape. He sees opportunity in stable companies with stressed balance sheets and notes that private credit spreads have held firm while public markets have tightened.Oak Hill Advisors, which has nearly $100 billion in AUM focused on sub-investment grade corporate debt, is now focusing on trying to provide capital, in either restructuring or refinancing transactions that take decent companies with bad balance sheets and reorganise them.

The likelihood of a September rate cut has edged higher. “They will move ahead with that,” predicts Brad Rogoff, head of global research at Barclays, in the latest Credit Exchange podcast with Lisa Lee.He adds, however, that the market “does need to get used to lower job numbers,” citing what’s currently taking place with immigration and fewer people coming into the workforce. “Just to have a healthy job market, we're not going to have the same job gains as we had.”Rogoff expects inflation to be above the Fed’s target for the back half of this year and into 2026. Chances for a recession in the near term are low, but over a longer time period, perhaps the next two years, the risks are definitely increasing.Fiscal spending will provide some stability as a counterpoint. The yield curve could steepen further and less so than if the US Treasury was issuing in a different way, or if questions around Federal Reserve independence become even more acute.Meanwhile, in Asia, China is going to be a big focus for the rest of the year. “We’ll probably see some stimulative effects implemented in China, but I’m not convinced that there's any bazooka coming,” Rogoff observes. “If we see growth continue to lag in China, that’s probably got to be your biggest focus at this point in Asia.”But a slowing economy is still a positive backdrop for credit and spreads should be tightening, though perhaps not to the degree they have. While Rogoff worries a little bit about the complacency in the market, when he looks down the credit spectrum, markets are proving leery of riskier assets, such as those rated triple C. “It hasn’t necessarily been the rising tide lifting all boats,” he points out.