BlackRock’s head of world direct lending has seen a rise in firms 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 firms with stress”.
Nonetheless, he added that he expects default charges to extend solely barely, utilizing the instance {that a} well-constructed portfolio might 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 12 months.
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Caron mentioned stress in a direct lending portfolio often comes from three areas: cyclical sectors, firms that took on a whole lot 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 may 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 progress for a decade anyway.
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Europe, he cited the advantages of defensive sectors corresponding to healthcare, tech {and professional} providers, the place he’s seeing an uptick in exercise.
“A number of financing is expounded to fragmentation,” he mentioned, noting the advantages of consolidation in a low-growth financial system.
“From an revenue perspective, spreads have stabilised,” he added.
“We noticed some unfold compression this 12 months however count on that to stabilise in 2025.
“You may nonetheless get double-digit returns on senior secured direct lending.”
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