KKR & Co. is urging investors sitting on the sidelines to stop obsessing over finding the perfect entry point and jump into the debt market as this year heralds a “golden age for credit allocation.”
“The timing and magnitude of rate cuts is impossible to predict,” Chris Sheldon, KKR’s co-head of credit and markets wrote in a letter to clients Thursday. “Our view remains that the economy is slowing, defaults will rise, but not sky rocket and that dispersion will increase, creating opportunities for credit selection.”
Higher-for-longer interest rate expectations make it “a good time to be credit investor,” though selection will be key given the wide-range of yields across asset classes, according to the firm, which manages $219 billion in credit. “Agility and idiosyncratic credit-picking likely will be paramount as dispersion increases.”
The alternative asset manager, like a growing number of Wall Street banks, finds collateralized loan obligations — or leveraged loans packaged into bonds — attractive, even as some other types of CLOs, particularly those tied to commercial real estate, have struggled.
The asset class is a good a way “to pick up incremental income and offset the sensitivity to getting the timing right on rate cuts,” Sheldon said. Spreads are wider on a relative basis, he noted in an interview.
Sheldon is comfortable moving into lower-rated and riskier debt, his firm is buying subordinated BB rated CLOs and owns KKR CLO equity. The asset class has seen a resurgence this year after a dismal 2023 and new CLO deals have had a record start to 2024.
“From a CLO standpoint, we feel better about going into the mezzanine tranches today with the view that defaults are not going to get out of control, but manager selection remains key,” Sheldon said.
Credit investors that followed Sheldon’s December call to snap up high-yielding debt likely profited as leveraged loans and junk bonds have notched returns of around 2.5% and 0.95% while investment grade debt has been a losing bet year-to-date.
KKR has been dipping into junk bonds, adding high-yield debt from the new issue market to its portfolios, in anticipation that the federal funds rate has hit its peak. In leveraged loans, the firm has been trimming its position while remaining overweight.
Private credit, meanwhile, is facing competition as the CLO and leverage loan markets reopen, according to Sheldon. “We see private credit deals being taken out and replaced with leveraged credit capital solutions and expect the trend to continue as M&A activity increases.”
But the wildly popular fixed-income sector is here to stay.
“Private and syndicated credit markets are going to coexist together,” Sheldon said. “As M&A picks up, we will see demand rise across the board.”
This article was provided by Bloomberg News.