The global credit cycle will remain in an expansionary phase for some time despite the mounting risks, according to Dan Robinson, chief investment officer of the US$26 billion CIFC Asset Management’s European operation.
Speaking at Investment Magazine’s Private Credit Forum in Melbourne, Robinson said investors were “over anxious” and the search for yield had led them to look at more “unfamiliar and unnatural” strategies. He blamed the media for fuelling investor unease.
“The press would have you believe that credit fundamentals are at their worst…but the headlines don’t tell the whole story,” he told delegates.
Robinson cited the media’s focus on the end of the credit cycle and its tendency to compare today’s environment with the eve of the global financial crisis. He did concede, however, that the current build-up in corporate leverage, the decline in credit quality and lower-underwriting standards were all consistent with late-cycle credit behaviour which was last seen on the brink of the credit crunch.
“But is it really appropriate to take an apocalyptic event, a once in a century event, and use it as basis for informing decisions about today’s investment activity when there is no evidence to back that up?” he asked.
Robinson, who specialise in sub investment grade credit, said there was a strong case to make that the credit cycle would remain in an expansionary phase for “a considerably long time”.
“If investors are not ready to call the end of credit cycle just yet … then comparison to the eve of the global credit crisis is not appropriate,” he argued.
Unusual times
Robinson told the audience that the starting point for all investment must be a careful analysis of the cycle.
“These are unusual times,” he said “We are in a very different environment today than before the crisis. For a start, the significant structural changes since the GFC have led to more structurally sound corporate debt and CLO structures.”
Crucially, he added, that the role of the central banks in monitoring and providing support was dramatically different to the pre-crisis period. “Moreover, today’s low interest rates are providing very strong cash cover ratios which are important if a corporate is in stress in a covenant-lite market.
Robinson said investors should not ignore the sheer amount of regulation – especially the changing role of the banks in extending credit that posed a risk to the financial system. He cited Commonwealth Bank which reported a tier one ratio of just 4.7 per cent in 2007 compared to today’s 12 per cent. In other words, CBA’s risk weighted leverage had shrunk from 21 times in 2007 to eight times today.
“We are not seeing true recessionary economics but rather some components of a recession which have been a feature of the global economy for a long time,” he said. “Without recession economics, it is very difficult to get to a place where you truly see high default rates.” He added there was little evidence of a material uptick in defaults or a diminishing demand for credit.
