This sector could have all its EBITDA eaten up in a year

First, I would say that we don't see the early indicators of broad-based credit stress. I think that the sectors that I am more worried about are probably some sectors that historically have been very strong performers.

One example would be the software space. Software has been one of the best performing sectors in high yield and loans over the last 10 years. As a result of how well it performed, companies were bought and sold at higher and higher multiples, and more and more leverage was put on these businesses. They are very high quality businesses, but they are very highly levered. And I do think that there is a challenge for some of these businesses that may be 8, 9, 10 times levered, where if SOFR is more than 5% and they might be paying 500 over SOFR, they're paying more than 10% on a huge amount of debt. That could eat up almost all of the EBITDA that they generate in a year.

And so I think that some sectors like that specifically that are more highly levered, are areas of concern. 

Again, we don't see that being enough of a broad-based phenomenon to drive real pain in the market overall. It can drive pain in that individual sub-sector, but if software is weakening while consumer starts to come back and healthcare margins start to recover and building products continue to chug along, we think that sets up as a very acceptable environment for us to pursue our strategy of taking targeted bets on individual credits that we think are really set up to perform.

How tight is bank lending, and what impact is this having on credit markets?

I think that the banks are definitely in a more conservative posture than they've been. I think if you go back to 2022, most of the large investment banks ended up committed to financings that they were ultimately not able to sell to the market at the prices they expected. And as a result, they experienced some losses on selling down that paper. In some cases, they still own that paper. And I think that they are not eager to replicate those problems.

Similarly, I think that there is a concern that after the failures of Silicon Valley Bank and Signature and First Republic, that the large banks are going to have higher capital requirements, and potentially be required to hold a different mix of assets. And that also contributes to them being just a little bit more risk averse in terms of what they're committing to. I think it creates an opportunity. It creates an opportunity for the private credit market to step in and facilitate transactions. It creates an opportunity for the leveraged credit market to refinance out private credit. It creates an opportunity for the leveraged credit market to get better terms on new loans and bonds that are being created, and hopefully get better spreads and yields.

Managed Fund

KKR Global Credit Opportunities (AUD) A

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