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.

With private credit booming, private equity firms are upping their forecasts for their lending businesses. Apollo Global sees loan origination exceeding $200 billion annually in the next couple of years, up from its previous forecast of $150 billion. It’s seeing increased loan demand due to faster economic growth and public and private spending on infrastructure.

What’s new is that many of these private equity giants are now looking at lower-risk lending to investment-grade companies to fuel growth. This would put them in even more direct competition with banks. Apollo’s co-President Jim Zelter sees many investment-grade domestic companies pursuing capital expenditure projects and believes that private credit can compete with fixed income and equity as funding sources.

Already, banks are feeling some impact. In Q1, JPMorgan reported $699 billion in non-consumer loans outstanding, which was a $3 billion decline from last year. CEO Jamie Dimon has warned that the entry of new lenders brings ‘an area of unexpected risk in the markets.’ 

Previously, he noted that these lenders have less transparency and regulations than banks, which ‘often gives them a significant advantage.’ He specifically cited startup banks, fintech companies, and private equity firms as examples of companies that function effectively as banks but are outside of the regulatory system. 

Finsum: Private credit is taking market share away from banks. Now, private equity firms are looking to target investment-grade companies. Many banks are warning that this brings risks to the financial system.

US annuity sales reached $113.5 billion in Q1, 21% higher than last year. It was also the second-highest quarterly figure on record after the fourth quarter of 2023, according to LIMRA. There was solid and impressive growth across nearly every category, and the organization anticipates that sales will remain strong for the rest of the year. 

Bryan Hodgens, the head of LIMRA research, noted, “The remarkable sales trends over the past two years continued into 2024. Favorable economic conditions and rising investor interest in securing guaranteed retirement income have resulted in double-digit sales growth in every product line.” 

Fixed-rate deferred annuities accounted for the biggest share of sales at 42%. This segment generated $48 billion in revenue, a 16% increase from last year. 85% of fixed-rate deferred annuities had durations of less than 5 years. 

Fixed-indexed annuities set a new record in terms of quarterly sales at $29.3 billion, 27% higher than last year. The next highest contributor were income annuities. Among this category, single-premium immediate annuity sales were $4 billion, a 19% increase from last year, and deferred-income annuities were at $1.1 billion, 35% higher than last year. Registered index-linked annuities saw $14.5 billion in sales and continue to be the fastest-growing segment with a 40% growth rate.

Finsum: Annuity sales maintained their hot streak with a new record for Q1 sales and the second-highest quarterly figure. LIMRA attributes this to high interest rates and unease about the economic situation.