By Alice Uribe
SYDNEY–Many investors feared companies’ pandemic-era borrowing spree would eventually lead to a financial reckoning. But even as interest rates are expected to stay elevated for longer, one of Australia’s biggest pension funds doesn’t expect corporate defaults to reach fever pitch soon.
Damian Graham, chief investment officer at Aware Super, said that although there is a risk there will be more defaults in 2024, “we’re not expecting to see a really significant default cycle.” That is why the market for private credit, where private funds offer bespoke corporate loans to borrowers, remains an important bet for Aware, which manages 160 billion Australian dollars (US$107.18 billion) in assets.
“My guess is that opportunity will remain for a while,” Graham said of the private credit market, which has boomed as traditional lenders such as banks stepped back from new loans amid an uncertain economic outlook. “Even if inflation stays higher and interest rates stay relatively high, as long as the default cycle is manageable, then I think you’ve got an ongoing opportunity to get reasonable returns.”
Graham said that, in general, corporate borrowers are in reasonable shape and leverage isn’t that high, though there may be additional pressure for earlier-stage businesses that are more highly indebted.
The possibility of interest rates staying higher for longer initially raised concerns among some investors that highly indebted corporate borrowers could have trouble paying back their loans. However, recent investor surveys show that many plan to increase their exposure to private credit.
One risk is the timing and speed of rate cuts, which remains unclear even though markets have rallied on expectations of looser monetary policy. The U.S. Federal Reserve recently tried to squelch speculation of a March cut. In the minutes of its December meeting, the Reserve Bank of Australia continued to send hawkish signals, keeping the door open to a further increase in the official cash rate.
Last month, Fitch Ratings said it expects 2024 default rates of 3.5%-4.0% for leveraged loans and 5.0%-5.5% for high yield, up from 2023 default forecasts of 3.0%-3.5%. Graham said a “modest uptick looks reasonable.”
He said that the structured credit market is of interest to Aware, with the market’s size being part of the appeal. Aware also sees opportunity in commercial property through this cycle, with offices as an investment potentially becoming more attractive, Graham said.
Write to Alice Uribe at [email protected]
Read the full article here
