Finding Value in Today’s Credit Market
Today’s credit market is more competitive than ever, yet compelling opportunities exist for investors who know where to look. Carlyle’s Head of Global Credit Mark Jenkins shares his views on where to uncover value in the current market environment.
The liquid credit market has been red hot so far in 2021. Do you expect that trend to continue? Why should investors take note?
Mark Jenkins: CLOs as an asset class performed well throughout the pandemic – a different kind of external shock than the market had ever experienced. Throughout the past year, the leveraged loan default rate stayed relatively low compared to the Great Financial Crisis, and is down to its lowest level since December 2019 according to the S&P/LSTA Leveraged Loan Index. Businesses on weaker footing were washed through bankruptcy, and many that made it through, cut their costs so significantly that we are now seeing growth in both revenue and EBITDA – a trend that differs from what we saw in 2019. We are observing corporate credit ratings upgrades and, given the high volumes that have recently come to market, loans are still trading below par. As a result, we are seeing diversified portfolios of performing credit at lower prices and higher spreads than prior to the pandemic.
It is clear that despite the challenges of COVID-19, the CLO asset class once again has thus far proven its resilience. We’re now at the start of new cycle of expansion during which the asset class is in a very strong position.
For these reasons, we believe investors should take note of the CLO market today. The vast majority of CLOs have delivered low- to mid-teen rates of return for equity holders over the course of the last 20 years and we have no reason to expect that will change. The diversity of the CLO structure – both by credit and industry – contributes to their ability to perform across market cycles and given their long-term time horizons, are resilient through periods of volatility.
What opportunities do you see today in illiquid credit and how is Carlyle Global Credit well-positioned to capitalize on investment opportunities?
As the economy continues to recover, the private credit market is starting to feel much like it did in 2019. We are seeing a significant uptick in M&A activity, accompanied by a growing need for non-traditional first lien structures, which private credit can provide.
Today’s market can be attractive, but it is competitive and requires managers to have a unique edge to succeed. Working with both sponsored and non-sponsored businesses, managers must understand complex situations, find opportunities and provide a tailored investment solution. Carlyle Global Credit leverages our global platform and deep expertise in order to transact quickly, decisively and effectively. Given our strengths, unlocking value in complexity is where we thrive. And with so much capital available in the market today, borrowers are choosing to partner with managers who can bring value beyond the balance sheet. We strive to bring the resources and insights of the entire Carlyle platform to each partnership in order to provide real value to our borrowers.
More than ever, borrowers are looking for quick decision-making and certainty of execution from partners who can support their needs to transition to a new market environment. Our strong credit origination platform and long history in the market enables our team to source opportunities effectively, move quickly and create customized solutions to benefit both borrowers and investors.
How do real assets credit strategies complement a portfolio?
From what we have seen, investors have incorporated real assets into their portfolios to gain the benefits of diversification and inflation protection, which remain important today. As global economies emerge from the pandemic, macroeconomic tailwinds are bolstering the opportunity sets for these asset classes and we are seeing compelling investment opportunities.
In aviation, we see meaningful opportunities as travel rebounds and post-pandemic demand increases. We believe in the long-term resilience of the industry and anticipate that aircraft supply and airline traffic will coincide later this year and put the sector on a strong recovery path through 2022 and beyond.
The enormous need to replace aging infrastructure systems and opportunity to implement modern technologies globally means that there will always be a significant role for private capital dedicated to infrastructure investment.
In real estate credit, we see opportunities in long-duration real estate assets, such as multi-family, which were strong markets prior to the pandemic and continue to demonstrate momentum in the recovery.
The main takeaway is that in a competitive market where dynamics can change quickly, it is critical to have capabilities to deliver a range of investment solutions to meet our investors’ needs while also having the ability to pivot to where the new opportunities are through a credit cycle. The broad, deep and diverse investment platform we have built – spanning liquid, illiquid and real assets credit – helps us do that.