Credit Exchange with Lisa Lee

“We’re at a reasonable balance now.” That’s the view of Stephen Ketchum, founder and CEO of Sound Point Capital Management, regarding the state of credit markets in June on the latest edition of the ‘Credit Exchange’ podcast with Lisa Lee.Sound Point, an alternative asset manager with over USD 43bn in AUM, de-risked its portfolio earlier this year, when the firm felt there was a little bit too much optimism. It then added risk when sentiment skewed toward an excess of pessimism in April.“We are in a world where there’s been a real paradigm shift in the way that our economy works,” Ketchum said, on the fading worries about an impending recession sparked by the ‘tariff tantrum’. The US in particular, but the developed world more generally, have moved on from what was, decades ago, a manufacturing economy with somewhat-predictable economic cycles. The US is now overwhelmingly a service economy, Ketchum said. Because of that, the last 15 years has seen two recessions, both of which were “self-inflicted”.Tariffs will be a factor going forward. While Ketchum doesn’t expect that the US will impose 50% tariffs on friendly countries, there will continue to be negotiations, “so we’ll be prepared to manage through that,” Ketchum said. “The companies that we lend to will be prepared to manage through that.”But for its private credit book, Ketchum could neither de-risk, nor add more risk. The most important thing is to underwrite for years, make sure one backs companies that have high barriers to entry in their market, and most importantly, have management teams you trust will be able to pivot when they need to, he advised.

While private credit broadly has showcased resilience and strength, “under the surface, not everything is as rosy,” according to James Reynolds, global co-head of private credit at Goldman Sachs. Reynolds spoke with Lisa Lee, managing director at Creditflux and editor-at-large at Debtwire, at this year’s Debtwire Private Credit Forum Europe in London on 17 June.Goldman has started tracking the debt-to-equity swaps in the industry because LPs around the world wanted to know what is really happening. Since 2017, the European direct lending market has seen around 120 debt-to-equity swaps across the industry – and interestingly, around half that number have occurred in the last two years.They tend to impact deals involving smaller companies from 2017, 2018 and 2019, and in more cyclical sectors such as consumer, retail and discretionary, Reynolds noted.That is resulting in real bifurcation in European direct lending. “You are going to start seeing dispersion in performance – it’s happening,” he said. “The question now that LPs should be asking is: what are the capabilities of direct lenders to go and own these businesses? It’s a different job than lending to a business.”Certain teams are going to come under pressure and there’s going to be more consolidation in the industry – indeed, it is already occurring. The landscape in direct lending in ten years’ time is going to look very different to today, with, in all likelihood, fewer, larger players, Reynolds said.

In this lively discussion, Alex Batchvarov from Bank of America shares insights on the irreversible trends reshaping capital flows, pointing to a shift in European credit appeal. Young Choi of King Street highlights the changing investor preference towards Europe despite previous concerns. Alex Leonard from Blackstone notes the influx of global investors into European markets, while Andrew Lennox of Federated Hermes emphasizes the resilience of ABS and CLOs amidst market volatility. Together, they contemplate the promising future of structured credit in Europe.

In this enlightening discussion, Matt Theodorakis, co-head of European direct lending at Ares and a seasoned expert in private credit and M&A markets, shares insights on the normalizing M&A landscape. He highlights increased investor confidence and anticipated deal-making activity. Theodorakis also explores the transformative impact of artificial intelligence on risk management in finance, asserting that leveraging AI could revolutionize decision-making within lending. He emphasizes the promising growth trajectory in European direct lending amidst a shifting economic environment.

Investors aren’t being paid enough a premium for the risks in US corporate credit, said Bryan Whalen, chief investment officer of fixed income at TCW, on the latest ‘Credit Exchange with Lisa Lee’ podcast.Whalen, who oversees USD 180bn in fixed income assets, contends investment-grade corporate credit spreads should be paying 50% more than they are. Investors should be getting 120 basis points of spread for IG bonds, but today they are getting paid close to 80bps, Whalen said.During the April volatility, there was a repricing of credit risk, but it didn’t lasted long enough to call the markets broken. But markets aren’t out of the woods, and it’s on the list of possibilities this year, according to Whalen. There are a lot of things that could cause volatility and if the Federal Reserve seems reluctant to rush to rescue markets, “you might actually see the market is broken because of the lack of liquidity,” Whalen said. “And it will stay broken, and that will magnify the downturn.”While Whalen likes being underweight corporate credit, he sees attractiveness in parts of the securitised market – mortgage-backed securities in particular, because some buyers that have traditionally been in the space have temporarily pulled back. Moreover, while Whalen doesn’t like US high yield bonds, he does like some high yield bonds in emerging markets. Asia has the potential to outperform relative to the rest of the world. On European growth prospects, markets may have gotten a little ahead of themselves on the narrative of a fiscal spending boost, and taken a pause on the approach of what Whalen describes, tongue-in-cheek, the “exporting of exceptionalism.” Still, there are some good opportunities in euro-denominated investment-grade corporate bonds, where investors get paid a decent amount of additional spread for the same company in a euro currency versus US dollars, he noted.

“Look at credit markets, they behaved quite differently this time,” said Eddie O’Neill, co-head of global liquid credit at KKR, about the period of volatility that whipped global financial markets in April. “They were very stable.”When equity markets were volatile, credit markets did see some selling off but in a very orderly repricing of risk. There was “no blood in the streets, no sustained buying opportunities,” O’Neill told host Lisa Lee at the Creditflux CLO Symposium 2025 in London. That there were three reasons: 1) the nature of the shock, which is policy driven, would take time to play out and the end result of it is still fairly unknown; 2) credit markets have matured in the last five years with new pools of capital becoming more significant; 3) the markets have been starved of assets and been technically driven through 2024 and 2025 with money on the sidelines waiting to step in.The European credit markets are more stable than the US, contended O’Neill. There is no significant ETF buyer base in Europe, the fundamental health of European corporates is pretty good, and Europeans have had the political realization that they need to turn things around. It's not without risk as maintaining political cohesion in Europe is difficult. Europe still has an Achilles' heel---energy costs and demographic will be a challenge. KKR is generally more bullish on Asia, said O’Neill. Despite the tensions between the US and China and slowdowns in the Chinese property market, Asia has the potential to continue to be a big driver of global growth. Asian credit will become a very big market over the next number of years, and investors should be looking at the region, he said. In particular, the investment grade credit market in Asia currently delivers significantly greater returns with lower defaults and loss rates compared to the US investment grade market.

People fail to give the private equity funds the credit they deserve, said Susan Kasser, head of Neuberger Berman Private Debt, on the latest ‘Credit Exchange with Lisa Lee’ podcast.Whilst in terms of investment opportunities, it has been a less productive start to the year, private equity funds have found interesting investment opportunities. Neuberger Berman has already committed to financing a number of new leveraged buyouts this year. There are a surprising number of companies that appear to be quite insulated from tariff exposure and are pretty recession-resilient as well – to a much greater degree than might have been expected, Kasser said.The beauty of a portfolio of privately-held, privately-negotiated, untraded loans is that concerns, volatility and market sentiment don’t really affect the loans, Kasser told Lisa Lee, managing editor of Creditflux. Rather, the only thing that does impact the loans is the fundamental performance of the companies being lent to. “That will take some time to figure out, but it looks like all should be well,” Kasser said.Kasser noted that an element of the underwriting that people miss is the importance of the private equity sponsor. They have three advantages in fixing a problem. These encompass control (they can make any change they want to), time (they don’t have to exit at any point in time), and capital (they have capital to support existing investments). A lot of problems, including things like recessions, tariffs, inflation, supply chain issues, and higher interest rates, are, to some extent, temporary and fixable, Kasser said.Neuberger Berman passes on many financing deals, even those that may look like good opportunities. “You just need to decide which way you want to err. And we have consistently decided we want to err on [the side of] capital preservation, margin of safety, zero mistakes for the investors,” Kasser said.

Craig Packer, co-president of Blue Owl and a pioneer in the private credit market, shares insights on the rapid growth of private credit and its potential to dominate leveraged finance. He tackles tough questions about market valuation discrepancies, the surge in Payment-in-Kind loans, and strategies for handling economic downturns. Packer believes that despite challenges, private credit will thrive as larger firms adapt to market shifts, creating opportunities amidst the evolving landscape of finance.

Volatility creates opportunity, Michael Zawadzki, global CIO of Blackstone Credit & Insurance, told host Lisa Lee on the Credit Exchange podcast.“Stick with the fundamentals that have been working for us and look to play offense where volatility creates opportunity,” said Zawadzki. In the seven or eight days following the 2 April tariff announcement, Blackstone traded over USD 5 billion of liquid credit.“When we see prices on the screen disconnect from underlying fundamentals, that's a time where you want to lean in,” he advised.“It doesn't mean you need to lean in with and push all of your chips into the centre of the table, but it does mean you can start buying with the expectation that you’ll add more into further weakness.”Private credit’s golden era never really ended. The period in 2023 when base rates were high and spreads were wide, and all deals coming to private was a really attractive market for private credit. Fast forward to today – Zawadzki predicts that they can see a repeat, getting deals that would otherwise have accessed the public market. In addition, private credit will maintain a durable 150bp to 200bp premium to the public markets and expand its reach to around a USD 30 trillion market, of which the bulk will be investment-grade private credit.Blackstone is also having more discussions around the place for European assets in its client portfolios, Zawadzki said.

The expected M&A rebound may take longer to materialise, but it will come, Vivek Bantwal, co-head of global private credit at Goldman Sachs, said on the Credit Exchange podcast. Both public markets and private markets have a place, and in some areas, there’s been a blurring of the lines between the two, Bantwal told Lisa Lee, the managing editor of Creditflux.Given Goldman’s role at the centre of that ecosystem, Bantwal thinks it’s important they are able to show their clients solutions in both markets side-by-side.When underwriting new deals right now, look at how tariffs might impact. But what else are you looking at, Bantwal asks. What’s changed, given the new uncertainty that’s popped up in this world and in investing?The other part of the analysis, though, may not be so much related to tariffs. If you have an economic slowdown or a recession, how is that management team planning to weather the storm? What do you know about their supply chains, what they do with their marketing or their capex plans? Staying close to your management teams and understanding their plans for how to navigate all that is a really important part of the underwriting process, Bantwal emphasises.There’s also opportunities in hybrid – the type of capital that sits in-between debt and equity and is very flexible. Hybrids can be used in a variety of ways, Bantwal notes – especially given the challenges in the private equity community to exit in the current environment.