(Bloomberg) — private loan In the latest survey, a majority of respondents said bonds would be safer than riskier publicly traded bonds if the U.S. economy were to go into trouble. Bloomberg Markets Live Pulse the investigation said.
Private credit typically involves lending directly to companies at rates higher than those quoted in the public syndicated bond and loan markets. People who offer such loans say they can gather more information about borrowers through direct lending and gain a better claim on assets if borrowers struggle to repay. That’s why more than half of the 387 respondents think it’s a better refuge than junk bonds when the next recession hits.
The MLIV Pulse survey underscored the gloomy outlook for high-yield bonds, with debt spreads expected to widen to about 450 basis points over Treasuries in 12 months. Compared with the current level of just over 316 basis points, this would mark the sell-off to levels last seen in the middle of last year, around the time of the regional banking crisis in 2023.
More risk aversion in public debt markets reflects respondents’ expectations of rising debt arrears from cash-strapped companies. According to S&P Global Ratings, about 90% of survey participants predicted that the default rate of U.S. junk bonds will continue to rise, after the default rate of U.S. junk bonds soared to about 4.7%. Still, most don’t expect it to have a wider impact on financial markets.
More than 40% said private credit was most likely to perform best over the next 12 months. Although most also predict that returns on direct loans will decline and quality will decline as competition among lenders increases.
Since debt is typically issued at a floating rate, investors benefit when the underlying interest rate remains constant High. And it doesn’t trade in as much volume, if at all, which makes the loans difficult to value and less volatile for investors’ portfolios when global markets move.
U.S. junk bonds and leveraged loans have returned about 12% over the past 12 months, while the S&P 500 has returned about 32%. Private debt investors can expect to earn returns in the high teens without the volatility and equity markets that are common in publicly traded debt.
The $1.7 trillion private credit boom has drawn criticism and regulatory attention for its lack of transparency and perceived mispricing of risk. But the preferences highlighted by the survey suggest investors are prepared to maintain rising base rates and volatility in other asset classes over the longer term.
Some investors worry that it will be difficult to detect when borrowers are unable to make their payments on time because lenders can negotiate how to keep them afloat. This is especially concerning when riskier companies face larger debt repayments, declining profits, and looming maturity walls.Some people worry that this is a bubble It may rupture, causing pain elsewhere.
At this point, most respondents predict that private credit margins and covenant quality will decline over the next 12 months as public markets become more competitive for business. Increased issuance of high-yield bonds and leveraged loans this year, with demand from yield-seeking investors helping to make these markets more attractive to U.S. corporate buyers.
Another lurks Danger For credit investors, expectations for commercial real estate will only continue to escalate. When asked whether commercial real estate pressures would worsen over the next 12 months, about three-quarters of respondents said they would.
About half of those who expressed concern thought it would only hurt banks, while the remainder expected it to hurt other asset classes. Only about a quarter of survey participants expected the bottom to hit next year.
To contact the author of this story:
James Crombie in New York (email protected)
