“There was a surprising amount of bubble talk at the Milken Institute’s Global Conference in Los Angeles last week.
Top investors and economists spoke publicly about their fear of inflated values for various securities and the broader economy—a decidedly less optimistic view compared to recent years at “Davos with palm trees.”
“I do see many signs of the bubble of the future—the default specter that you’re talking about. I agree that short term we’re not likely to see that, but all the danger signs are there of a future crisis,” Marc Rowan, co-founder of $161 billion private equity firm Apollo Global Management, said during a panel discussion.
“Covenants have been stripped away, cov-lite is the norm, senior debt levels are actually higher than they were in 2007, although total debt is not quite where it was,” Rowan added, noting looser lending terms given to borrowers.
“We’re back to doing exactly the same things that were done in the credit markets in the crisis.”
“It’s just indiscriminate buying. There are no covenants whatsoever. It’s covenant light and there’s just no creditor protections. PIK-toggle is back in a big way,” James Litinsky, founder of investment manager JHL Capital Group, said of leveraged loans and high yield bonds while speaking on a separate panel.
“PIK-toggle” refers to a “payment in kind” bond that allows the issuers to defer paying interest on the note for a higher rate later on, essentially trading a cash payment for a new bond.
“We’ve seen this movie before. We know how it ends,” Litinsky added. “We don’t know where we are—maybe there’s another year to go but as we know, when psychology changes, it changes fast.”
Justin Slatky, a senior portfolio manager at credit-focused investment firm Shenkman Capital Management, agreed while speaking on the same panel….”
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