Pacific Investment Management Company (PIMCO) President Christian Stracke expressed optimism about the asset-based financing sector within the private credit market, but warned of risks in direct corporate lending, which represents the majority of the market. He emphasized the growing gap between these two lending sectors.
Stracke stated: "There are some issues (in corporate private credit), where borrowers go to lenders and say, 'Can I not pay cash interest now, but instead borrow the interest from you and pay it later?' This practice is called payment-in-kind (PIK), and it's quite prevalent now."
**Balance Sheet Divergence**
Stracke described the credit environment for asset-based financing as "much healthier." He added: "In asset-based financing, in areas like residential mortgages, consumer loans, student loans, and auto loans, the economy is performing strongly, household finances are robust, and consumer strength is solid. We really don't see problems there."
This divergence stems from the impact of the 2008 global financial crisis. After the crisis, consumer borrowers reduced their borrowing and deleveraged household balance sheets, which helped promote asset-based financing activities. In contrast, corporate borrowers increased their leverage ratios, with balance sheets becoming "less healthy."
Last October, PIMCO raised over $2 billion for its asset specialty financing strategy as part of its continued expansion into private credit markets.
Stracke noted that corporate borrowers also face trade-offs between public markets and private debt markets. Private markets have fewer lenders, meaning borrowers can more easily renegotiate loan terms when facing lending pressure, albeit at higher costs. On the other hand, more liquid bank debt costs much less, but the refinancing process can be more complex.
Stracke stated: "Syndicated loans or bonds are more difficult. We're seeing some real problems in credit markets. There have been some default cases in credit markets and public markets, making it difficult for companies to negotiate with lenders to preserve company value."
Looking ahead, Stracke indicated that as the Federal Reserve continues to cut interest rates, the total cost of borrowing decreases, particularly mortgage rates, presenting PIMCO with opportunities to capitalize on this credit demand.
David Elia, CEO of Australian pension fund Hostplus, stated that institutional investors seeking portfolio diversification are increasingly attracted to private markets, but he suggested that regulation should focus on the retail wealth sector.
Speaking at the Milken Institute Asia Summit, Elia said any push to strengthen private market regulation should center around retail investors attracted by the diversification benefits of this asset class, rather than sophisticated institutional investors.
Elia said: "There are probably about 19,000 listed companies in global markets. There are 140,000 private companies with revenues exceeding $100 million. As long-term institutional investors, if you truly want diversification, you won't see the concentration levels in public markets. Therefore, this will drive you toward the unlisted space, primarily focused on private equity investment types."
He also predicted more IPOs in the coming months.
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