As banks and other large institutions continue to delever, opportunities for non-traditional lenders and other private credit funds will likely continue to expand, said panelists discussing the state of the credit market at the Milken Institute Global Conference in Los Angeles.
“Large banks will continue to equitise, deleverage and simplify their balance sheets,” said Tony Ressler of Ares Management. “Traditional fixed income portfolios – high grade corporates, agency mortgages, US government – are generally looking at 2-3 percent expected returns.”
“No matter what any of us say or do, the pie going to alternatives is going to significantly increase over the next several years. And the area of the pie that we find particularly interesting … the non-bank, shadow bank non-traditional bank institutions will … grow considerably.”
In particular, Ressler highlighted CLOs, business development companies and specialty REITs as particularly well suited to the opportunities he sees coming to the fore.
“All will have a particularly good run in our estimation if they build a brand; if they evidence a discipline to whatever area of lending they particularly participate in.”
As banks continue to delever, many non-traditional lenders may be able to snap up opportunities on the European market, panelists said.
“Two years ago, we were letting our European portfolio run off relatively rapidly, because it seemed to us the only things that were for sale were really awful loans,” Joshua Friedman, co-founder of asset manager Canyon Partners. “And they were awful loans because the banks really didn’t have the balance sheet to be able to sell decent distressed product at a low price. They were booked too high and they were capital inadequate.”
The situation has changed dramatically in the last six months, he said, adding that although it has not developed into a “major source of flow”, opportunities have started to surface at a relatively stable clip. This has been aided – in part – by a smaller number of players in the market, which enables those who are capable of sourcing European bank debt to find better deals.
“European bank debt isn’t syndicated as broadly … so when an institution finally sells, it tends to be a new credit to the market. There are a relatively small number of people who go in and do the due diligence.”