Credit Exchange with Lisa Lee

• Investors still pivoting to fixed income – Oaktree’s Wayne Dahl

  “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.

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• We have traded private credit loans and others will follow – Loomis Sayles’ Matt Eagan

  “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.”

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• The ‘real economy’ of Europe needs financing – Arini’s Mathew Cestar

  “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.

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• Paradigm shift in US economy lessens likelihood of tariff-induced recession – Sound Point’s Stephen Ketchum

  “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.

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• Not everything in private credit is rosy – Goldman Sachs’ James Reynolds

  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.

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