Where do you think credit is heading over the next five years?
Curious what people who do this daily actually expect vs the hype, and where AI fits into that.
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Based on the most insightful WSO discussions, here's what you need to know about the future of credit and AI's role in it:
Credit Market Trends:
AI's Role in Credit:
The Human-AI Balance:
In summary, while AI will continue to enhance efficiency and predictive capabilities in credit markets, it won't replace the human expertise required for nuanced decision-making. The credit market itself is poised for both opportunities and challenges, with AI playing a supportive but not dominant role.
Sources: https://www.wallstreetoasis.com/forum/hedge-fund/machine-learning-taking-over-hf-research-analyst-roles-in-near-future?customgpt=1, Math Checks Out | The Daily Peel | 3/24/23, AI in fundamental investing, State of Credit markets now and in the future?, Thoughts on AI and the future of the job market?
Personal view only - take it with a grain of salt.
Think Senior Secured, Sponsor-Backed DL is commoditized. All Direct Lenders are spewing the same non-sense on how to think about downside risk, but end up competing on price (vs. actual credit merits of the business). I am shocked to see even how much of MF PC is just relationship lending with sponsors. Risk is fundamentally mispriced in the asset class. Think a good credit cycle will clean out the credits, and show which managers are relatively better at underwriting risk.
I would take care to note that the signs of default are more delayed and often more severe once they appear in DL, because private lenders have so many ways to kick the can for default that by the time such a default arises your LGD is probably fucked. Covenant packages between BSL and DL are converging very closely. Pricing on DL is also coming down though still at a premium to lev loans. I think DL will always have a place, though maybe as bridge financing when companies are too small for BSL, then as they grow will refinance to a leveraged loan solution.
AI will also likely impact the space in that everyone can get up to speed in any industry to a decent level relatively quickly with AI. I think the differentiating factor now will be more specialized credit funds, that pick their industry verticals and have a more differentiated, experienced POV on sectors. Maybe using their industry experience or incumbent position in credits as a meaningful differentiator in sponsor discussions. As a result, I think we will see portability clauses become more prevalent in credit agreements, so DL can follow credits through different owners, extracting greater duration period of yield without too much incremental work.
Obviously, Sponsor backed DL is a small portion of the PC market, the growth tailwinds are supposedly strong in ABF. I am not super familiar with the space, but it could be that this is the next frontier. If I were developing a career, and did not have any pre-disposed inclination to any one asset class, I would consider ABF.
agree with the above ABF take
there is lots of demand on AI + energy + infrastructure which requires enormous capex which a single company may not be able to fund it/keep it on their BS, and banks may also have a hard time financing those, so you'll have more asset financing. On top of it, you also have many more assets than companies, which mean that more money can be allocated to ABF before it becomes too overcrowded/overfunded, so you'll have some years of continuous growth on this side (career opportunities/interesting work/etc.)
on another perspective, I would also expect many more LMEs/distressed opportunities given that many capital structures / sponsors will need to be refinanced (but this may be offset to an extent if you have lots lenders out there taking a cut on their ask
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