Credit Exchange with Lisa Lee

“We are going to see consumer pain, and particularly on the lower-income side of things,” says David Saitowitz, head of US liquid credit at ICG, a global alternative asset manager with $127 billion in AUM, on the latest Credit Exchange podcast with Lisa Lee.That means certain sectors could get hurt while others do very well, he says, adding that it’s a trend he’s already seeing. Anything consumer related – whether it’s housing, travel, to apparel and retail, are under pressure. “Those areas, I think, are all feeling a decent amount of pain, and I think they will continue [to].”Saitowitz is especially worried about housing, as rates stay higher for longer. The economics around housing continue to be weak and that has real implications for people everywhere, he observes.He also notes that we are in an interesting time where, with a massive technological innovation underway, that factor could be overshadowing geopolitical events which may have been considered in a more serious way previously.On artificial intelligence, ongoing new advancements will lead to difficulties for software firms, he believes, especially those that were over-levered and need to refinance soon. “We will see some LMEs; we will see some bankruptcies,” he says.And when that does happen, he adds, recent history suggests recoveries will probably be worse than we have seen in some time.But that said, there’s plenty of companies that will do just fine, and Saitowitz doesn’t believe there will a widespread or massive spike in defaults.

Private credit firms, including Hayfin, are still willing to lend to software companies, says Marc Chowrimootoo, co-head of direct lending at alternative asset manager Hayfin, on the latest episode of the Credit Exchange podcast with Lisa Lee.“If that call comes in, we absolutely take that call,” says Chowrimootoo, on how he responds to a request from a private equity fund for a software LBO financing. “We absolutely give it the due care and attention.”But the willingness to partake has moderated, he adds. “Everyone is being much more judicious.”There are a number of questions you can go through with a private equity buyer who understands what they’re doing, Chowrimootoo says. For example: how can I understand why this is more insulated than others out there? How embedded is this platform with its customers? What’s different about the ownership of data in this particular asset? What’s the protected moat around the end customer, and the usage of this in the technology?Regarding software exposure more broadly in the private credit market, Chowrimootoo notes that Europe has less exposure compared to their counterparts in the US. In addition, while retail capital is a huge portion of the US market, European private credit funds have less than EUR 10bn in retail vehicles.On the geopolitical front, Chowrimootoo says Europe has had to deal with many periods of volatility. “It’s way too soon to be making a judgment on where the direction of travel is on credit spreads; where the direction of travel on default levels are; where the direction of travel is on stress of earnings.”

The current period is a “really important rite of passage” for retail access to private credit and direct lending, says Tristram Leach, head of investments Europe at Apollo Global Management, on the latest episode of Credit Exchange with Lisa Lee.“The five percent number is there for a reason,” says Leach, speaking about recent outflows from semi-liquid private credit funds that have seen a pickup in redemption requests (some firms have given back more than the agreed 5%; some have limited at 5%).“It’s important to protect remaining investors. It’s a level of liquidity that has been promised. And in general, we think the appropriate way to proceed is to do what you said you’d do.”Direct lending, he believes, will continue to grow – but it needs to go through a period where there are elevated redemptions in the marlet.“People want their money back. You have to see the products work as they were designed to work. And the way they’re designed to work is they give five percent. That, broadly speaking, is the appropriate design, and how it should function,” Leach contends.He adds that we are still in a fairly early period in the development of wealth access to direct lending. Consequently, it’s understandable that results in a “slightly flightier” asset base compared to institutions.Leach understands the argument that the central composition of the direct lending market does put it more in the crosshairs of this threat. “The very high software concentration, certainly among some of our peers in private credit, does create some additional risk when you think about AI disruption,” says Leach, who is also the co-head of European credit at Apollo.Across the firm, Apollo has around 2% software exposure. Even within direct lending, Apollo is “clearly at the bottom end of the range,” Leach says.Nonetheless, he believes the market was relatively slow to wake up to the potential of AI. “What’s surprising to me is that when Claude Code came out, the market suddenly noticed,” he says. “We’ve been watching the incredible pace and development of large language models for several years now.”On Europe, the Iran war probably represents more of a cyclical threat to Europe than the US because of the energy price dynamic and geographical proximity, Leach believes. “That is definitely a headwind to growth; it’s a headwind to cyclical industries.“Especially for companies exposed to growth in Europe, that’s going to be a challenge, because of the inflation impacts to energy prices.”Nonetheless, that doesn’t materially impact Leach’s expectations for greater infrastructure investment and defence investments on the continent.“There’s been a huge change in the attitude of European policymakers towards the need to spend money, become more productive, become more competitive. All these things are clearly felt viscerally within Europe because of how fragile the continent’s position seems. I think you’re going to see changes, and I think you’re going to see Europe seek to take advantage of the opportunity,” Leach says.Leach also shares why, in football, he is wholly committed to Atlético Madrid.

“We’ve never had more undrawn capital,” says Jonathan Dorfman, chief investment officer at Napier Park Global Capital, a $40bn alternative credit manager. Napier Park has been prepping for a repricing of financial assets that predates the Iran war and the software crisis, Dorfman said in the latest episode of Credit Exchange with Lisa Lee.Have ready cash and take advantage to buy assets that are going to come up for sale very soon, Dorfman advises. He says credit spreads should widen further: “We are going to see more and more problems occur, and more and more bad headlines.”While Dorfman believes people will look back and say the headlines over private credit’s software issues were overblown, it’s appropriate there’s been a dramatic repricing, because of the enormous uncertainty caused by AI. The more sophisticated software companies are not going to sit still, and they will figure out how AI benefits them, and come out stronger. But some won’t.On risk from the Iran war, Dorfman says history shows that markets usually have a short-term, very violent downward move with some type of capitulation to major geopolitical developments – but then they recover. Sustained high oil prices need to last at least a few months to meaningfully affect the real economy, and therefore financial markets. Right now, it’s too early to tell if this is a buy-the-dip moment. But it’s probably a fine strategy, he reckons.A pioneer of the credit default swap, Dorfman says the CDX index is saying there’s a lack of fear about a recession and/or a meaningful economic slowdown. Risk premiums are higher, but they’re not high in an absolute sense that would be consistent with a slowdown.

“Private markets and private credit can be very, very helpful,” says Andrew Davies, in reference to the emerging dislocations he sees in financial markets, on the latest Credit Exchange podcast with Lisa Lee. Davies is the head of credit at CVC Capital Partners, a global private markets manager with more than EUR 200bn in AUM.That help could be in the form of helping banks that are struggling to offload underwritten debt, scooping up publicly trading debt that’s priced too low, or providing to financial sponsors who find banks pared back, Davies says.“We’ve seen it every time there’s a period of volatility,” he adds.CVC and private credit is still deploying, despite increasing geopolitical risks, fears of AI disruption, and negative headlines around the industry, particularly in the US. European private credit is different, Davies contends, with more stability in capital flows that are more reliant on institutional investors rather than affluent individuals. The opportunity in Europe is to access a fragmented market that is less mature and has less competitive tension.“It’s been somewhat immune from that over the last year or so, in terms of what you’re sensing coming out of the news flow in the US,” Davies says.His biggest worry is around a heightened risk environment in the geopolitical landscape. There has already been short-term price action in energy markets, which Europe is very exposed to. “Does that flow into inflation? Does that flow into rates? Does that flow into a number of things?” he asks.

“You are going to hit a little bit of a wall because of power. You’re going to hit a little bit of a wall, because of the sheer capital that’s supposed to be there to finance that piece,” says Joel Holsinger, co-head of alternative credit at Ares Management, on the latest edition of Credit Exchange with Lisa Lee.Holsinger expects to see a slowdown, because the current level is “probably unsustainable” for the sheer amount of capital that is required for all these projects, along with the amount of power generation that needs to be built.Already, banks are trying to reduce their exposure across some of their data centre names, Holsinger says – not due to risk or fear, but because they want to buy more.“They’re already at capacity issues, because the opportunity set is so big,” he says.Holsinger adds that there are emergent signs of concern for troubled credits.“Right now, we’re in the situation where the tide has not gone out. That’s very clear,” he surmises, referencing Warren Buffett’s famous line. “Underlying fundamentals are generally good. But you’re seeing some random nudity on the beach.”This said, Holsinger contends there are not yet huge cracks emerging in underlying credit markets, either on fundamentals or spreads. But he believes we are at the end of the cycle, and there is more news to come.Holsinger, who is co-head of the Ares Charitable Foundation, also discusses philanthropy and “Promote Giving”, an innovative method to commit at least 5% of fund performance fees to charity.

The investing environment has gotten hard, says Christopher Sheldon, co-head of credit and capital markets at KKR, on the latest episode of Credit Exchange with Lisa Lee. “It’s adult swim only.”There’s a lot of uncertainty in the market, and much of the investor community is trying to figure out what playing field they’re on, explains Sheldon. He discusses KKR’s latest investor letter, titled CTRL + ALT + CREDIT, intended to reboot how investors are approaching credit.Sheldon contends that you have to be well-versed, have scale, and create your own origination, because elevated defaults and downgrades along with spreads tightening results in a “tough recipe”.“The more flexibility you have, the more ways to win. The more scale and breadth and origination you have, the more ways to win,” he says.Sheldon worries about lack of new supply in debt markets, that may cause spread tightening. He also notes the growing concern around outflows from certain markets. Right now, the private credit market is starting to see some flows come out on the wealth side, which is fine as redemptions are often capped. But if that is sustained for long periods of time, there may be a little bit more volatility in the market, he warns.On AI, the technology is moving so quickly that there is a need to be thoughtful, be able to pivot, and re-underwrite these businesses. In the liquid market, it’s important to have the flexibility to buy or sell, and to get out of situations where that thesis might have changed. In illiquid markets like private credit, he advises to focus more attention on structures that protect from assets being stripped out, from cash leaking out of the system. “Even if you do worry that maybe it’s a little less resilient, having that structure could be the key differentiator of having ball control,” he says.“Even if you do worry that maybe it’s a little less resilient, having that structure could be the key differentiator of having ball control,” he says.Sheldon also reiterates that the private credit market is not just the direct lending market any longer. The bigger part of the private credit market is asset-based finance, which is financing the real world economy, whether it be consumer loans to hard assets like aircraft or commercial lending, or music intellectual property. ABF is a huge growing market and is a great diversifier to portfolios today, he reckons.KKR credit investor letter: https://bit.ly/4aYV4pN

Europe has mostly missed the AI boom that’s driven a large part of US economic growth, says Mathew Cestar, president of Arini Capital Management, on the latest episode of Credit Exchange with Lisa Lee, taped in the London offices of the alternative asset manager. But that actually makes European credit more appealing, because while the intersection of technology and AI is an exciting equity story, that intersection in credit can involve “a lot of risk.”Cestar, who was once the co-head of investment banking at a large global bank, expects to see a broadening of M&A deals in terms of size, sectors and geographies, given the supportive interest rate and anti-trust environment. He also sees continued interest in Europe from global investors. And he welcomes more regulatory scrutiny for private credit, predicting that will result in better players in the market.“We’re super-embracing the fact that regulatory folks are now focused on private credit,” says Cestar. “If you want a market to grow sustainability and consistently, the regulatory framework is critical.”On the private credit market, Cestar forecasts troubles, that will lead to more dispersion of returns among shops. “We’re expecting an uplift in some of the private credit defaults,” he says. Defaults in the space have so far been relatively muted, but “that will start to change, because they can’t defy gravity,” Cestar believes.

“We have this great tool out there called AI, and we haven’t 100% figured out how to implement it yet,” says Mark Jenkins, co-president and head of global credit & insurance at Carlyle, on the latest edition of ‘Credit Exchange with Lisa Lee’. Jenkins predicts that the next stage is going to be how corporates implement AI into their workflows, and that the process is “really in the first innings of implement”.OpenAI, Anthropic, and many others are developing tools for workflow, and Jenkins predicts they will take “not years, but several months” to impact systems. Carlyle, for example, is already using AI to help its investment group be more efficient, and to consume massive amounts of data in ways that would be difficult without AI, says Jenkins. But one has to use AI appropriately, he adds. “It’s not going to make the decision for you.”While change has been a constant feature during Jenkins’ 35-year career, nothing has been like AI in the past three years. Embrace the change and incorporate it into what you do, because typically, those are the ones that prosper, he counsels.On the broader investing climate, Jenkins is positive about the macroeconomic environment for the next 12 months. But moving out to 2027 and 2028, inflation may rear its head again.

“Whether it be in the high yield bond market or in the leveraged loan market, even the hint or threat of AI impeding on really any sector – you see pretty significant downside,” says Mitch Garfin, co-head of leveraged finance at the world’s largest asset manager BlackRock, on the latest episode of Credit Exchange with Lisa Lee.Garfin is constructive on the market generally, with growth continuing to “chug along” and inflation currently well-contained. He also identifies significant opportunities from AI, including ongoing data centre build-outs contributing to a significant uptick in supply in the high yield market that is likely to continue.But, he notes, there have also been situations where bonds and loans are down anywhere from a couple of points, and in some cases 5 or even 10 points, on “the immediate sort of threat” from AI. “It’s something to keep an eye on,” he says.Discussing the high yield market specifically, Garfin observes that consumer and retail continue to lag. “We’ve been underweight retail, consumer products, restaurants, leisure – a lot of the sectors that are going to be more impacted by a declining or weaker low-to-middle-class consumer,” he says.He also gives advice to younger industry hopefuls, including staffers and investors.

“It’s going to be a slow build, and we think a sustained multi-year increase in activity,” says David Miller, head of private credit and equity at Morgan Stanley Investment Management, on the latest episode of Credit Exchange with Lisa Lee, speaking about M&A and LBOs.The geopolitical headlines haven’t yet changed the economic picture, says Miller. But over time, they may impact on confidence and fan uncertainty.“As uncertainty rises, risk premium will rise. So that can change the calculus - but we’re not seeing it in the markets yet,” he observes.Miller also discusses running both the private equity and private credit businesses at Morgan Stanley’s asset management arm, a team that numbers more than 150 strong, and what it’s like being part of a global bank.

R.J. Gallo, deputy CIO of fixed income at Federated Hermes, addresses the recent DOJ move to investigate Federal Reserve chairman Jerome Powell and the possible impact on monetary policy, on the latest episode of ‘Credit Exchange with Lisa Lee’.Gallo, who will take up the fixed income CIO role in May, says we might see a more divergent FOMC where the votes actually matter.“Does that make them more hawkish? I don’t know. I’ll tell you this. It certainly won’t make the hawks more dovish,” he says.“It’s important to realise that many presidents get frustrated with the Federal Reserve,” adds Gallo, who prior to joining Federated Hermes in 2000, was at the Federal Reserve Bank of New York. But what has been extraordinary in the Trump administration has been the full-on verbal assault of the Federal Reserve and the resultant “feud between the White House and the Fed.” And the most recent development of the DOJ subpoena has to be viewed in that context.On fixed income, Gallo takes a bit more of a cautious view. While his base case is for the US economy to grow in 2026, he is keeping some powder dry to reassess, in case there’s spread widening. “We don’t just want to chase an already highly-valued market.”Another thing to watch is AI, which has accounted for a large portion of equity returns and stimulated the US economy through high capex spending. If we see poor returns to AI capex, that could challenge equity and credit valuations, Gallo says.

“I come into the year extremely bullish about fixed income and credit in general,” says John Lloyd, global head of multi-sector credit at Janus Henderson, on the latest episode of Credit Exchange with Lisa Lee. The asset manager oversees nearly half a trillion dollars of AUM.Lloyd speaks about how markets are shrugging off some recent big geopolitical events because they do not impact earnings today and are viewed as one-off events, bespoke to a single country. Instead, they are focused on positive GDP growth as well as the Fed, which will be a tailwind to investing, as the US central bank is now injecting liquidity back into markets.Artificial intelligence is also a focus. The hyperscalers will increase their capex budgets because they are in a race over the next several years.Google, Facebook, Oracle and others are all issuing a tremendous amount of debt to support that capex growth. “You are going to see a lot of supply increase this year from AI,” Lloyd says. “I think that’s going to be a little bit of a negative supply technical in the fixed income markets this year, especially in the investment grade space.”

While credit is “probably a four-letter word right now,” it is doing reasonably well, says Tom Majewski, founder and managing partner at Eagle Point Credit Management.“But headlines around the space will continue, and perhaps that unto itself creates some credit challenges,” he adds on the latest episode of Credit Exchange with Lisa Lee.Majewski unpacks the First Brands collapse and fraud in general, noting there’s been a significant decline of occurrences of fraud in the US economy since the Sarbanes-Oxley Act of 2002.He also discusses liability management exercises (LMEs), or coercive restructurings, sharing Eagle Point’s upcoming research that shows there’s been over 100 LMEs in the last five years. “If there’s a little over 1,000 loans, that’s about a 2% LME rate per year, separate from defaults.”

The degree of inflation the past few years has stretched the ‘K’ that defines the K-shaped economy, says Cindy Beaulieu, chief investment officer at Conning Noth America, in the latest ‘Credit Exchange with Lisa Lee’ podcast. Asset valuations and home prices have further added to the pressure.The labour market is central to consumers in both the top and bottom of the K. The upper cohort are participating in the economy in a strong way. The bottom cohort are also participating – but even a modest amount of inflation is painful for them, because the base level of prices now is so much higher than it was just a few years ago.“I would put right in the centre of those two lines of the K, the labour markets,” says Beaulieu, who sets fixed income and equity strategy for Conning North America, which serves the insurance industry and has nearly $200bn in assets under management. “It’s kind of like a rubber band. As long as it doesn’t snap, it holds the K together.”In terms of investing, Beaulieu thinks corporate fundamentals are good. While valuations are stretched, all-in yields are accretive, particularly to fixed-income portfolios. She likes the structured areas and private placements.

The driver for 2026 will be the real step-change in capex requirements all around the AI data boom and the needs of hyperscalers, said Fabianna Del Canto, co-head of EMEA capital markets at MUFG, on the latest episode of the ‘Credit Exchange with Lisa Lee’ podcast.“The absolute quantum required by the data centres dwarfs really any other type of infra-spend that we’re seeing,” said Del Canto.Among myriad other effects, AI has brought about a previously-unimaginable type of demand on, effectively, the entire energy supply ecosystem. Because it’s impacting such a large-scale industry and multiple secondary ones, this is a “real seminal moment and period in time, in terms of how we’re shaping the economies going forward for the future,” she added.But financing the AI boom will look different in Europe and the US.“In Europe, you’re seeing a lot of discussion amongst leaders in the energy space trying to solve this from a sustainable angle,” Del Canto said. “It’s not energy at any cost or any type.”Beyond data centres’ capex needs, Del Canto expects capital markets to be just as busy in 2026, if not busier. As a result, there’s a risk of spreads widening.“We see a very healthy pipeline, and supply is going to keep ticking up in our view,” she said.

Innovation on the liability side is allowing insurance companies to change their funding costs and be more competitive, says Gary Zhu, deputy chief investment officer of insurance at AllianceBernstein (AB), in the latest episode of ‘Credit Exchange with Lisa Lee’.Zhu discusses the proliferation of insurance capital into private assets. He explains that dynamic has to do with lengthening lifespans and a declining lapse rate, the percentage of policies that don’t renew, which has allowed insurance firms more flexibility on liquidity.“They can deploy that capital into private assets, and earn that incremental spread, without giving up anything that they needed,” he says.On the recent stock market volatility, Zhu says that staying invested during good times and bad is important for equity investors in general. On investing, AB’s insurance silo, which has around $200bn in AUM, has been overweight allocations to residential housing credit.“We like the housing market in the US,” he says. “So [the] residential credit market seems to be a place that people have underappreciated the value in the housing markets.”

The end of the US government shutdown has paved the way for a “renewed melt up,” says Matt King, founder of Satori Insights, on the latest episode of Credit Exchange with Lisa Lee. Not just risk assets like equities and credit, but things like gold and Swiss francs, as people worry about how this ends – even as the tide of easy money pushes everything upwards, says King, formerly Citi’s global markets strategist and one of the most widely-followed commentators on financial markets.Since early 2024, the linkage between central bank liquidity and credit spreads and equities has weakened somewhat. It’s not disappeared entirely, but in equities especially, different factors have had an impact. Exuberance and excitement around AI are part of the story, King says, but there’s also ongoing support from fiscal policy and huge fiscal deficits, as well as the massive growth in repo to around a trillion dollars a year, which is becoming increasingly important.“It’s about how much money we’re creating and where that money is then going,” King argues. “I think that’s the main mistake investors have made. If you’ve tried to invest on the basis of your economic view, for over a decade, you’ve struggled, because the drivers here are markets first, and then the economy bringing up the rear.”

The bankruptcies of auto sector firms First Brands and Tricolor Holdings hold “lessons for the future” for credit investors, says Tetragon co-CIO Dagmara Michalczuk on the latest episode of Credit Exchange with Lisa Lee. “The governance issue, although it seems like a soft and fuzzy idea, is incredibly important,” Michalczuk says. “Investing with folks that are not transparent – that has its risks. Lessons can be learned and should have been learned, in both instances.”Overall, Michalczuk’s assessment of the general macro outlook sees slow growth, “slower than what we saw post-pandemic.” With this said, she agrees with the consensus view in the market that 2026 might see a reacceleration of growth, given the downward trajectory of rates, significant fiscal stimulus in the US and Europe, deregulation, and the ongoing capital investment in AI.Credit investors should be prudent and have informed views and opinions on AI, Michalczuk says. At Tetragon, Michalczuk’s team is adapting by looking across their portfolio, “not just [at] software and tech companies, but all of our exposures,” considering both potential positive and negative impacts. “The big concern… is we’re missing something, [that] a business very rapidly becomes undone by a newcomer that disrupts the industry.” That’s why continual reanalysis over time is important, Michalczuk says.

“There are lots of mixed signals out there,” says Chris Wright, president of Crescent Capital Group, on the latest episode of Credit Exchange with Lisa Lee. That’s creating uncertainty. “When we think about the investment environment, we approach it with caution.”On the bankruptcies of First Brands and Tricolor, Wright doesn’t see them as canaries in the coalmine or a tipping point in the economy. But they do show that due diligence matters. There were audit flags, governance failures, and opaque structures that sounded warning bells. “We have to be diligent in our work,” Wright notes.Crescent, a global credit manager with almost $50bn in AUM, recently launched a CLO ETF and has plans to introduce other product, Wright adds. While too early to say whether Crescent will start a European CLO management business, it’s “certainly something that is on our drawing board and we’re spending a lot of time thinking about and assessing,”, Wright says.