James Keenan, head of credit at BlackRock, said that one of the ways his team looks for extra income is via direct lending in the U.S. and Europe, as well as traded markets in Asia. He said that private equity has made a comeback in the last few months.
“If you have the right tenor of capital and the right fund structures, some of the private market activity, some of the direct lending where you can get 8%, 9% or 10% for first-lien assets with 50% loan-to-value on new performing assets, that’s very attractive," he said. "Think about these being three- to-four-year average life instruments. That’s an area that really slowed down because during the crisis private equity really slowed down from new [M&A] deals. … We really like that from an exposure standpoint in income.”
Keenan said the Asia and Chinese markets have also significantly rebounded. “There’s good yield there,” he noted. “That market continues to evolve and grow. There are some traded instruments there that [tend] to be more shorter duration, think of two to three years that you’re getting high single digit-type yield and, again, diversification relative to what you’re getting in the U.S. market.”
In U.S. traded markets, he said, his team remains hesitant in sectors like energy and areas affected by Covid but he thinks that quality companies with 4% to 5% yields are a good anchor for spread risk.
Keenan said the early-stage defaults during Covid were from companies that were already stressed—energy companies and companies like Frontier Communications and Intelsat. Those types of firms suffered from secular market problems, balance sheet stress or overleveraging.
But companies in more stable industries bounced back thanks to the liquidity put back into the system, he said. Industries that were priced to liquidate early in the year have recovered but they might take three or four years to get back to 2019 levels. Names in lodging, leisure, transportation and energy industries could still see defaults over the next couple of years, however.