BlackRock’s head of world direct lending has seen a rise in corporations displaying stress throughout the sector however nonetheless expects defaults to stay low.
On the asset supervisor’s 2025 Outlook EMEA Media Roundtable this week, Stephan Caron mentioned “there’s no denying we’ve seen a rise in corporations with stress”.
Nevertheless, he added that he expects default charges to extend solely barely, utilizing the instance {that a} well-constructed portfolio may even see the proportion of losses enhance by 10 foundation factors whereas nonetheless producing 12 per cent returns.
He additionally expects covenant ratios to enhance subsequent yr.
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Caron mentioned stress in a direct lending portfolio normally comes from three areas: cyclical sectors, corporations that took on loads of debt in a low-rate setting and idiosyncratic conditions.
He mentioned the proportion of ‘watchlist’ names in BlackRock’s portfolio is between 5 and eight per cent however highlighted that watching these positions and liaising with the businesses doesn’t essentially imply they are going to lead to losses.
Amid fears of a flip within the credit score cycle, Caron mentioned that BlackRock doesn’t count on a recession within the US and made the purpose that Europe has not seen a lot development for a decade anyway.
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Taking a look at Europe, he cited the advantages of defensive sectors akin to healthcare, tech {and professional} companies, the place he’s seeing an uptick in exercise.
“Plenty of financing is expounded to fragmentation,” he mentioned, noting the advantages of consolidation in a low-growth economic system.
“From an revenue perspective, spreads have stabilised,” he added.
“We noticed some unfold compression this yr however count on that to stabilise in 2025.
“You’ll be able to nonetheless get double-digit returns on senior secured direct lending.”
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