The Credit Edge by Bloomberg Intelligence

Small-cap US companies are at risk of default as debt comes due and the economy slows, according to Alan McKnight chief investment officer at Regions Bank. “Look at the Russell 2000 — over 50% of those names are non-earners right now. They’re actually unprofitable,” McKnight says in the latest Credit Edge podcast from Bloomberg Intelligence. “There’s a lot of names in that sort of realm that could be on the tipping point, particularly in light of when they have to refinance their debt,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence credit analyst Matthew Geudtner. McKnight sees particular stress on companies exposed to low-income US consumers. McKnight and Geudtner also discuss opportunities in the industrial and defense sectors, including major borrowers like Honeywell and Lockheed Martin. See omnystudio.com/listener for privacy information.

Antares Capital, the US-based private credit firm, is looking to expand in Europe and also sees opportunity in real estate, infrastructure and asset-backed finance. “In order to scale, we’d probably need to do an acquisition,” Tim Lyne, the direct lender’s chief executive officer, says in the latest Credit Edge podcast from Bloomberg Intelligence. “We are constantly evaluating Europe,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence senior credit analyst David Havens. Lyne and Havens also discuss Antares’ funding strategy, areas of market stress, fundraising and the broadening of the private credit investor base. “You’re beginning to see this democratization of the asset class,” says Lyne.See omnystudio.com/listener for privacy information.

 Politics and commercial real estate are the biggest perils for banks, according to Bloomberg Intelligence senior credit analysts Arnold Kakuda and Jeroen Julius. “In terms of CRE, it hits mostly the smaller regional banks,” Kakuda tells Bloomberg News senior editor James Crombie in the latest Credit Edge podcast from Bloomberg Intelligence. “If the sovereign rating comes down or is put on negative outlook, bank ratings are likely to follow,” Julius says, referring to European financial institutions. In addition, Julius and Kakuda debate unrealized losses sitting on balance sheets, consolidation, regulation and the outlook for more bank bond issuance. They also weigh opportunities in Additional Tier 1 and preferred debt. “You get high-yield returns for IG risk,” says Kakuda, speaking of the latter. See omnystudio.com/listener for privacy information.

Private credit markets are under pressure from high interest rates, while excess demand is keeping spreads low, according to Wayne Dahl, co-portfolio manager for Oaktree’s global credit and investment grade solutions strategies. “I think there will be some general stress,” says Dahl in the latest Credit Edge podcast from Bloomberg Intelligence. “When people get excited, they put money in — the end investor has no choice but to invest that, and therefore you’ll maybe see spreads compress a little bit more than would otherwise be warranted,” Dahl tells Bloomberg News’ James Crombie and BI Senior Credit Analyst Mike Holland. Also in this episode, Dahl and Holland discuss risk in the health care sector, as well as opportunities in consumer staples, insurance and securitized credit. See omnystudio.com/listener for privacy information.

Commercial mortgage-backed securities are the best credit opportunity for the next 12 months, according to Oded Manor, global head of fixed income manager research at BlackRock. “CMBS is super-interesting because everyone hates it — or many people hate it,” says Manor in the latest Credit Edge podcast from Bloomberg Intelligence. “That market is already pricing a lot of the negative news, unlike many other parts,” Manor tells Bloomberg News’ James Crombie and BI Senior Credit Analyst Jody Lurie. Also in this episode, Manor and Lurie discuss liquidity risk, as well as relative value between bonds and loans. In addition, Manor talks about headwinds in European credit markets from the upcoming French election.See omnystudio.com/listener for privacy information.

Up to a quarter of Europe’s high-yield borrowers can’t afford to pay the current high interest rates to refinance debt that’s coming due, according to alternative asset manager Arini. “The market has been very active in refinancing these companies but we still have a lot to do,” says Hamza Lemssouguer, founder and chief investment officer of Arini, in the latest Credit Edge podcast from Bloomberg Intelligence. For as much as 25% of the market, “it’s just impossible to afford the current interest rates,” Lemssouguer tells Bloomberg News’ James Crombie and Giulia Morpurgo, and Bloomberg Intelligence Senior Credit Analyst Tolu Alamutu. Also in this episode, Lemssouguer and Alamutu discuss challenges in the commercial and residential real estate sector. And Lemssouguer talks about how to invest in debt collectors. See omnystudio.com/listener for privacy information.

Private credit’s double-digit returns are here to stay, even as interest rates drop and risks rise, according to Arcmont Asset Management. “Our spreads have been very consistent for a decade,” says Mattis Poetter, the European private debt firm’s co-chief investment officer, in the latest Credit Edge podcast from Bloomberg Intelligence. “I think that’s sustainable,” he tells Bloomberg News’ James Crombie and Kat Hidalgo, and Bloomberg Intelligence Senior Credit Analyst Robert Schiffman. In addition, Arcmont’s co-CIO discusses private debt defaults, pay-in-kind structures, debt-for-equity swaps and opportunities in net-asset-value financing. Also in this episode, Poetter and Schiffman weigh market dislocations and opportunities for rescue financing. See omnystudio.com/listener for privacy information.

The best credit investments are in asset-backed securities, particularly those linked to US households, according to JPMorgan Asset Management. “We absolutely see opportunities for yield pickup there,” says Kay Herr, the firm’s chief investment officer for US fixed income, in the latest Credit Edge podcast from Bloomberg Intelligence. “The consumer’s going to be OK,” she tells Bloomberg News’ James Crombie and Bloomberg Intelligence Senior Credit Analyst Julie Hung. The CIO meanwhile flags potential risks building in private credit that could ripple through high-yield debt markets. Also in this episode, Herr and Hung discuss retail trends as high- and low-income consumers diverge. See omnystudio.com/listener for privacy information.

US companies with about $200 billion in debt — 10% of the junk market — can’t survive at prevailing elevated interest rates, according to Bank of America. “At the bottom decile, we are looking at issuers that are in most likelihood not going to be able to come out of this high-rate episode without doing something to their balance sheet,” says Oleg Melentyev, head of US high-yield strategy at Bank of America, in the latest Credit Edge podcast from Bloomberg Intelligence. “Half of that segment is free-cash-flow negative unless the Fed cuts interest rates soon and deep — which is a pretty weak assumption,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence Credit Analyst Matthew Geudtner. Also in this episode, Melentyev and Geudtner discuss the outlook for companies in the commodity and capital goods sectors. See omnystudio.com/listener for privacy information.

Invesco is buying real estate investment trust debt and preferred bonds from banks, betting that the US economy stays strong and interest rates eventually fall. “If you’re looking at yield, it is kind of a golden age for bonds,” says Matt Brill, the $1.6 trillion money manager’s head of North America investment-grade credit, in the latest Credit Edge podcast from Bloomberg Intelligence. “You’re getting paid to wait and at some point here, you’re going to get that kicker of the Fed starting to cut,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence Senior Credit Analyst Tolu Alamutu. Also in this episode, Brill and Alamutu discuss commercial real estate risks and opportunities as rates stay high. See omnystudio.com/listener for privacy information.