KKR & Co. is urging investors to embrace the debt market despite uncertainties surrounding interest rates, marking what they believe is a “golden age for credit allocation.”
In a letter to clients, Chris Sheldon, KKR’s co-head of credit and markets, emphasized the difficulty in predicting rate cuts. He noted that while the economy is expected to slow and defaults may rise, there will still be opportunities for credit selection amidst increased dispersion.
The firm, managing $219 billion in credit, advises that higher-for-longer interest rate expectations present favorable conditions for credit investors. However, prudent selection is crucial due to the varying yields across asset classes. Agility and careful credit-picking are emphasized as dispersion widens.
KKR, alongside numerous Wall Street banks, favors collateralized loan obligations (CLOs), particularly those tied to leveraged loans packaged into bonds, as attractive investment options. Despite struggles in certain CLO types, Sheldon views this asset class as a means to generate incremental income and mitigate sensitivity to rate fluctuations.
Sheldon expresses comfort in investing in lower-rated and riskier debt, as evidenced by the firm’s acquisition of subordinated BB rated CLOs and ownership of KKR CLO equity. The resurgence of this asset class in 2024, following a challenging 2023, is noted, with new CLO deals starting the year at a record pace.
Regarding credit investment outcomes, those who followed Sheldon’s December advice to pursue high-yielding debt likely reaped profits, with leveraged loans and junk bonds delivering notable returns compared to investment-grade debt.
KKR’s strategy involves acquiring high-yield debt from the new issue market while reducing exposure to leveraged loans, anticipating that the federal funds rate has reached its peak.
Sheldon observes competition emerging in private credit as CLO and leverage loan markets reopen, with private credit deals being replaced by leveraged credit capital solutions, a trend expected to continue with increasing M&A activity.
Despite evolving dynamics, Sheldon believes that both private and syndicated credit markets will coexist, with demand expected to rise as M&A activities escalate.
