Credit Exchange with Lisa Lee

“From what I could see in our proprietary data, we are seeing a bit of a slowdown,” says Lauren Basmadjian, head of liquid credit at Carlyle, a powerhouse with USD 199bn in credit assets under management, in the latest ‘Credit Exchange’ podcast with Lisa Lee.It's early days, with only about 10% of the portfolio companies that Carlyle lends to having reported thus far. Cautioning that it’s not fulsome data, Basmadjian says that companies are reporting low-single-digit growth in the second quarter, down from mid-single-digit growth in the first. And it’s happening in both the US and Europe.When investing, be conservative right now, advises Basmadjian. For example, leveraged loan spreads have fallen to remarkably low levels, with some at tights not really seen before the Great Financial Crisis. Between the two markets, the European loan market offers better value, she believes.“When I look at the loan portfolios that we could put together in Europe versus the US, you probably capture an extra 60 basis points or so,” Basmadjian says.As for LBOs, Basmadjian says there are more processes going on in the background, but it’s too early to tell whether they’re going to come to fruition. “When pencils went down in April, pencils are back up now,” she notes.“But it takes a while to get the engine going. And we don’t expect to see a lot of new LBO and M&A activity for the remainder of the year. That saddens me to say. But I do think that there’s a lot more in the background, and it just takes a while for it to come to our market.”

“There’s nothing more compelling than live sports,” says Mark Attanasio, co-founder of asset manager Crescent Capital Group, on the latest Credit Exchange podcast with Lisa Lee. The marketplace, now some USD 3tn in size, has the most-watched programs in media, as well as the ability to bring communities together.Attanasio, who is the principal owner of the Major League Baseball team the Milwaukee Brewers, has become the majority owner of the English football team Norwich City. The self-described ‘Ted Lasso’ of English football owners expects to take the team back to the Premier League in three to five years.His advice to others wanting to invest in sports: start by being careful about ego purchases, even as a minority owner. Because it’s not easy to win.There will be trading in minority investments in sports over the next decade or two as that market matures, predicts Attanasio.Turning to credit, the co-founder of Crescent, which is approaching USD 50bn of credit AUM, says he expects to see more private credit loans trading, and that the asset class will “definitely grow to a secondary market.”“All the markets, as they reach a [certain] size, go that way – including, by the way, sports,” he says. “You have a lot of secondary interest in sports teams that trade the NFL,” says Attanasio, who has seen particular minority pieces of US football teams selling for very high valuations.“You’d expect to see additional liquidity in minority investments in sports over the next decade or two, as that market matures. And I think it’ll be good and bad for the market,” Attanasio predicts, pointing to better liquidity, but tighter spreads for investors.

Corporates have showcased resilience in navigating policy shifts, according to Amanda Lynam, Head of Macro Credit Research within the Portfolio Management Group at BlackRock, on the latest edition of the ‘Credit Exchange’ podcast with Lisa Lee.Lynam also noted the surprising resilience of corporates to navigating a higher cost of capital.But she advises monitoring the very important feedback loop – the link between corporate margins, the labour market, consumer spending, and overall economic activity and growth. “Right now, we are pretty constructive. Would characterise it as cautiously optimistic, but that could change very quickly – just like we’ve seen in other episodes,” Lynam said.To effectively monitor that feedback loop, investors should focus on the high-frequency commentary coming from corporate management teams. “That was instructive during the pandemic, about the true length of supply chain disruptions, which was actually much longer than many market participants and economists expected,” she said. “And I think it will be informative in this environment as well, both positively and negatively, about how corporates can navigate this environment. So that’s the one thing that we are watching.”Lynam makes a bit of an out-of-consensus call – selectively move down in credit quality in spite of the policy uncertainty and the residual overhang from that. Oftentimes, in an environment like this one, the automatic reflex action is to generically move up the ladder in quality. “Actually, that may not be the right call this time around,” she said.At the same time, she doesn’t advise chasing all the way down the risk spectrum, into those pockets of the market that were already under pressure. “We wouldn’t be chasing all the way down to triple Cs,” she said. “But, for example, investors that are concentrated on the investment-grade market, we like moving down into the triple B pocket of that market – because, in our view, that’s an opportunity to pick up some additional spread, some additional risk premium, but not compromise too much on credit quality.”“I actually think being a bit more opportunistic and not shying away from credit risk, but taking it in a selective way, is the right call,” she observed.Investors can also capture some pretty attractive all-in yields in European corporate credit, she added, while the European corporate credit market also has some pretty favourable technicals.But with that said, Lynam doesn’t see a wholesale reallocation from US dollar-denominated assets into Europe. “The case for American economic growth, productivity, the private markets in the US, for example, funding innovation – I think that’s a really compelling story.”

“I’ve continued to see large investors, both on the individual side [and] on the institutional side, continue to rotate their portfolios into fixed income,” said Wayne Dahl, co-portfolio manager of global credit and global credit investment grade strategies at Oaktree Capital Management, on the latest edition of the ‘Credit Exchange’ podcast with Lisa Lee.Economic growth will slow, forecast Dahl, noting the challenges from tariffs and their impact on inflation, consumer sentiment, and the job market.“We have to be eyes-wide-open to the fact that maybe some of those real positive factors in the first half might not have the same impact in the second half of the year,” he observed.But that’s a good environment for credit. Despite credit spreads being near their tights, the sub-investment grade segment remains at a pretty attractive level, Dahl said. Investors can earn in the sub-investment grade credit space what some people would consider almost equity-like returns, but with less risk and less volatility.High yield bonds, leveraged loans, structured credit such as CLOs, CMBS, RMBS – all these earn above seven percent. “And that’s a pretty good-trade-off for portfolios, to lock in that coupon, [to] be able to de-risk your portfolio, [and] still meet your objectives,” Dahl said.That being said, Dahl cautioned there is stress building, pointing particularly to leveraged loans. “I think, as an active manager, that’s something you’re keenly aware of,” he said.

“We've done our first trades and some of the first trades in the industry in investment grade private,” says Matt Eagan, who heads the full discretion team at Loomis Sayles and oversees USD 80bn of AUM, on the latest edition of the Credit Exchange podcast with Lisa Lee.Eagan, who sits on the asset manager’s board of directors, likens investing nowadays to Ozzy Osbourne’s song Crazy Train. Structural changes including the ageing of the workforce, the heightened need for security, and the growing US fiscal debt are inflationary factors, and should change how one conceptualises investing, says Eagan.Credit is a good investment right now, Eagan notes. However, rather than looking at spreads, which are currently tight, Eagan advises focusing on the risk premium.“People remember episodes where credit has been very tumultuous because that’s where the excesses were,” he says. “Today, they’re not there. The private credit market has derisked the public sector. The private credit market is a behemoth that’s almost become the mirror image of the public markets.”Private credit will evolve including a huge portion of the market becoming more liquid. Loomis has bought private investment grade credit in the secondary market. It has also co-mingled private credit into its public portfolios, including mutual funds. “We’re not the only one doing this,” he says.“I think investment grade privates will be one of the biggest ones that'll get to this point, where you’ll see much more secondary market activity.”

“We know there’s a big pan-European need for financing,” says Mathew Cestar, president of Arini, one of the fastest growing alternative credit managers, on the latest edition of the Credit Exchange podcast with Lisa Lee.Cestar, who has more than 25 years of experience in European credit markets and once headed a major investment bank, details the evolution of capital markets in the region, from high-yield bonds to leveraged loans and now, private credit.“European companies have never really had a love affair with public capital markets, largely in the sense that they are cookie-cutter and often volatile. Many of these companies, particularly at the mid-size [level], tend to be family owned, multi-generational, and private – they require something much more bespoke, relationship-driven and meaningful,” he says.Via lending to the ‘real economy’, Cestar sees a significant opportunity across various sectors in Europe to go beyond lending to companies owned by private equity shops. And he discusses the recently-announced partnership Arini inked with Lazard – the first private credit and bank partnership of scale in Europe.“As global pressures apply, we’re seeing not just M&A activity rise, but essentially the streamlining and reshoring of European businesses, and so there’s ample opportunity for capital investment to facilitate that,” notes Cestar.

Stephen Ketchum, Founder and CEO of Sound Point Capital Management, shares insights on navigating the evolving U.S. economy. He discusses the shift from manufacturing to a service-oriented landscape and how it influences recession fears. Ketchum emphasizes the importance of underwriting resilient companies in the face of geopolitical risks and tariffs. He also highlights the transformative role of AI in enhancing investment strategies, reflecting on his firm’s impressive growth from $35 million to $45 billion in assets under management.

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.