High Rates Crush $200 Billion of Junk Debt, BofA Says

Private debt doesn’t offer high enough returns to justify the growing risks, according to Pimco. “Fundamentals are deteriorating in more levered portions of the credit markets,” said Mohit Mittal, chief investment officer for core strategies at Pimco. “You’re seeing more complacency, so you have to be very thoughtful, you have to be very careful.” Investment-grade direct lending pays only half the premium needed to compensate for worse liquidity than in public markets and rising fundamental concerns, Mittal tells Bloomberg News’ James Crombie and Irene Garcia Perez and Bloomberg Intelligence’s Stephen Flynn in the latest Credit Edge podcast. Mittal and Flynn also discuss the outlook for the telecoms and the cable media sector, including consolidation and deleveraging. See omnystudio.com/listener for privacy information.

Schroders Capital is seeing growing interest in private debt from investors looking to diversify as returns in public markets decline. It’s finding the best relative value in commercial real estate where over-exposed regional banks can no longer lend. “The most interesting opportunity, I think is looking where there’s emotional bias and fear,” says Michelle Russell-Dowe, co-head of private debt and credit alternatives at the asset manager, in the latest Credit Edge podcast. Schroders also likes residential real estate and equipment finance, Russell-Dowe tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst David Havens. Russell-Dowe and Havens also discuss new investors in private credit like retail, high-net-worth individuals and family offices. See omnystudio.com/listener for privacy information.

Blackstone Inc. expects private credit to balloon to $30 trillion in size, fueled by the energy transition, housing and data center lending. “We’re really expanding the opportunity set from quite a narrow part of the market to really a mainstream part,” said Rob Horn, global head of infrastructure and asset-based credit at Blackstone. “Not only can we get hard-asset collateral — which differs from what they get in the public market — but we also get a premium return,” Horn tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst Tolu Alamutu in the latest Credit Edge podcast. Horn and Alamutu also discuss the outlook for residential real estate. “It’s still going to be a decent year, despite the fact that we have this troubling geopolitical risk backdrop,” says Alamutu. See omnystudio.com/listener for privacy information.

The $1.7 trillion private credit market faces several challenges after years of rapid growth, according Ana Arsov, global head of private credit at Moody’s Ratings. “It’s going to be very important to get more transparency from the banks about is there some kind of synthetic leverage, additional leverage, coming to this market,” Arsov tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst David Havens in the latest Credit Edge podcast. Arsov and Havens also debate the impact of exchange-traded funds and broader implications of private debt stress. “It just doesn’t seem like the risk-transmission mechanism is nearly as potent in the way that private credit is structured today, as it has been in maybe some other areas that have caused systemic problems in the past,” says Havens.See omnystudio.com/listener for privacy information.

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Victory for Kamala Harris in the US election would boost the bonds of basic industries, capital goods companies and utilities, according to Matt Mish, head of credit strategy at UBS. “A lot of that we think is tied to the preservation of the inflation reduction act and support of many of the Biden-era stimulus policies,” Mish tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst Julie Hung in the latest Credit Edge podcast. Conversely, a win for Democrats would be a drag on debt in the telecoms, tech, banks and auto sectors. Victory for Donald Trump would be positive for energy, autos and aerospace defense, Mish adds. Also in this episode, Mish and Hung debate the outlook for US consumers and stress in private credit markets. See omnystudio.com/listener for privacy information.

As commercial real estate continues to menace banks and investors, Goldman Sachs Asset Management is leaning into the debt. “What we’ve been able to do is find a lot of opportunities in commercial mortgage-backed securities,” Lindsay Rosner, head of multi-sector investing at the company, told Bloomberg News’ James Crombie and Bloomberg Intelligence credit analyst Jody Lurie in the latest Credit Edge podcast. “It’s a good portion of our portfolio, and we think it generates a decent amount of carry.” In this episode, Rosner and Lurie also debate the outlook for retail and leisure sector companies as lower-income US consumers come under pressure.See omnystudio.com/listener for privacy information.

Funding companies with unsustainable debt loads has been “the best opportunity in the corporate credit market over the last year or two,” Jimmy Levin, Sculptor Capital Management’s chief investment officer, says in Bloomberg Intelligence’s Credit Edge podcast. Separately, Sculptor expects substantial growth in asset-based finance, where Levin sees double-digit returns, he tells Bloomberg News’ James Crombie and Irene Garcia Perez, and BI credit analyst Stephane Kovatchev. Also in this episode, Levin and Kovatchev discuss the outlook for rates, the resilience of US consumers and positioning in the debt of cyclical industrial companies. See omnystudio.com/listener for privacy information.

Norinchukin Bank faces significant losses from the sale of US and European sovereign bonds that tumbled as interest rates rose, and other financial institutions may also be exposed. “The bank is still losing more than a billion dollars a quarter,” says Bloomberg Intelligence senior credit analyst Pri de Silva, referring to the Japanese agricultural bank also known as Nochu. “They need to rip that band aid off and address negative carry in the securities portfolio,” de Silva tells Bloomberg News’ James Crombie in the latest Credit Edge podcast. De Silva also weighs the outlook for Asia’s Additional Tier 1 bond market, where risk premia are shrinking as supply evaporates. Also in this episode, Mary Ellen Olson, senior credit analyst at Bloomberg Intelligence, discusses the turnaround at India’s Vedanta, which may tap the US dollar bond market, as well as the impact of China’s economic slowdown on Asian miners. See omnystudio.com/listener for privacy information.

Lending to law firms against portfolios of legal assets can generate hefty returns, according to North Wall Capital, the London-based credit investor. “We target 25%-plus IRRs, and we have historically outperformed that,” Fabian Chrobog, its chief investment officer and founder, says in Bloomberg Intelligence’s Credit Edge podcast. Separately, North Wall aims to make “mid teens” gains in middle-market private credit, Chrobog tells Bloomberg News’ James Crombie and BI senior credit analyst Tolu Alamutu. Also in this episode, Chrobog and Alamutu discuss creditor protections, real estate opportunity and the advantages of geographical diversification. “I can see the returns in the US decreasing while I can see still some really interesting opportunities in Europe,” says Chrobog. See omnystudio.com/listener for privacy information.