The Blackstone Group’s head of private equity Joe Baratta made headlines a few weeks ago when he declared that the US is “in the middle of an epic credit bubble” during his remarks at a Dow Jones event in New York.
But are we? One person who doesn’t appear to think so is Tony James, president of… erm, The Blackstone Group.
“When base rates go back up, the spreads could be expected to narrow and that would cushion – for sub-investment grade – some of the effects of the anticipated rise in treasury rates. So it kind of depends on how you want to look at it,” said James, when asked about Baratta’s comments during a third quarter earnings call earlier this week.
“From a historical context, I think we'll look back on this as being one of the lowest interest rates any of us has seen in our careers. But it doesn’t mean it has to devastate the sub-investment grade market.”
On one hand, that James believes the tightening of spreads will mitigate some of the damage done by the inevitable increase in interest rates is encouraging. After all, like many private equity firms, Blackstone has taken advantage of cheap financing in high yield markets to refinance some of their holdings. It’s also been plenty active as a lender through its credit arm, GSO Capital Partners.
On the other hand, some have argued that the availability of cheap credit has propped up the value of companies, effectively kicking their problems down the road. When base rates do rise – something that is expected to happen within the next year – businesses that have managed to survive by way of repeated refinancings will face a difficult predicament. To his credit, James recognises this. In his words, refinancing “doesn't solve the issues, by the way, it just delays them.”
What could ultimately serve as a saving grace for these companies is the fact that any rise in interest rates will occur only after the US economy clears certain hurdles set by the Federal Reserve as a measure of economic health. If anything, an improved economy should ease companies’ ability to obtain financing, James said. One would imagine because banks and other lenders would be more willing to adjust their attitudes towards risk as the economy improves.
So are we in a bubble? Possibly, but James has managed to find a way to take some air out of it.