At the annual Milken Institute Global Conference, many expressed concerns that, as rates remain elevated, there is increasing liquidity risk for some borrowers. So far, robust economic growth has masked these underlying issues, but many borrowers would be vulnerable in the event of an economic downturn.

So far, default rates have remained low. Skeptics contend that this is due to amendments made to loan terms, leading to maturity extensions and payment arrangements. Ideally, these maneuvers would buy time for borrowers until monetary conditions eased. 

Yet, economic data has not been supportive of this outcome so far in 2024, leading to more stress for borrowers and concerns that defaults could spike. According to Katie Koch, the CEO of the TCW Group, “This cannot be extended forever. Eventually, those default rates will rise.” Danielle Poli adds, “It is going to be ugly. Many of these companies are burdened with excessive leverage, with holes in their covenants like Swiss cheese.”

Some investors sense opportunity as there has been an increase in bridge loans to borrowers, searching for liquidity. Oaktree Capital has reduced exposure to syndicated loans and raised cash levels to take advantage of any dislocations. In addition to bridge loans, there is also increasing demand for hybrid capital, which is in between senior debt and equity and provides liquidity and cash flow relief to borrowers.

Finsum: At the annual Miliken conference, Wall Street heavyweights warned that as rates remain elevated for longer, borrowers are getting more stressed and that a spike in defaults is looming.