Lauren Basmadjian, Carlyle’s co-head of liquid credit and head of US loans and structured credit, is expecting industry issuance of collateralised loan obligations to hit a record this year.
“It feels like we’re in the beginning of a new credit cycle,” Basmadjian said in an interview with Private Debt Investor after Carlyle last week reported that first-half fundraising for the firm surged nearly 50 percent on same period a year ago. Basmadjian said that CLO issuance for the entire industry already has set records in 2021, with Wall Street estimating it will hit $130 billion-$140 billion this year.
Carlyle also reported last week that fee-related earnings in global credit surged 25 percent, to $46 million in the first half of the year, partly driven by increased management fees from strong CLO origination activity over the past 12 months.
Basmadjian, who PDI chose as one of its Women of Influence in Private Debt in its inaugural report this year, said that the “vast majority” of borrowers in CLOs that have reported sales and earnings so far this year have surpassed even of those of 2019. “A lot of companies took covid as an opportunity to rethink their cost structure and cut a lot of costs,” she said.
Even though CLOs saw some company defaults during the pandemic, industry defaults peaked last September at 4.17 percent, compared with the approximately 9 percent peak during the financial crisis.
“Defaults, I think, are in the past for now”, Basmadjian observed, adding that she believes the current 1.5 percent default rate “probably goes lower from here” all things being equal. Data released last week showed that the default rate of the S&P/LSTA (or Loan Syndications and Trading Association) Leveraged Loan Index dipped to just 0.58 percent in July, the lowest it has been since April 2012.
Many of the companies in the 4 percent of the market that filed for bankruptcy last year were those that were “already in a tough situation” before the pandemic hit. She added that portfolio companies in the industry have seen two times more upgrades than downgrades, and that a mere 1 percent of CLO loans trade under 80 cents.
“CLOs are highly diversified by both issuer and more importantly, by industry,” Basmadjian said, with healthcare and technology, for example, performing very well during the crisis and helping to hold up the structure of CLOs.