Apollo Global Management LLC co-founder Marc Rowan said he sees many signs of a bubble in the credit markets that could lead to another financial crisis.
“All the danger signs are there of a future crisis,” Rowan said today at the Milken Institute Global Conference in Beverly Hills, California. “We’re back to doing exactly the same things that were done in the credit markets during the crisis. Our job is to step wisely and try to avoid that.”
Rowan joins a growing chorus of regulators and investors, including Marathon Asset Management LP and DoubleLine Capital LP’s Jeffrey Gundlach, in expressing concern about aggressive underwriting standards as the Federal Reserve’s zero-interest policy extends into a sixth year. Rowan’s co-founder, Leon Black, echoed the concern at the conference today, saying loans with loose terms are being issued “fiercely.” Still, the debt is luring investors as defaults are near record lows and the U.S. economy strengthens.
“Money is incredibly easy,” Black, Apollo’s chief executive officer, said today. “Institutional memory doesn’t exist.”
The central bank, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have warned in recent months that underwriting standards for speculative-grade issuers are weakening as investors become more willing to accept weaker terms.
“Of course we’re concerned” about credit markets, said Tad Rivelle, chief investment officer for U.S. fixed-income securities at TCW Group in Los Angeles. We’re in the “latter stages of the credit cycle.”
Leverage, or debt to earnings before interest, taxes, depreciation and amortization for U.S. speculative-grade borrowers tracked by Standard & Poor’s Capital IQ Leveraged Commentary and Data, has risen to a multiple of more than 5 times this month from 4.1 last April and the post-crisis low of 3.5 in February 2009.
The average yield on junk bonds at 6 percent compares with a 10-year average of 9 percent, Bank of America Merrill Lynch index data show. Companies have tapped into the soaring investor appetite for high-yielding assets with record sales of $380.3 billion of junk bonds last year, according to data compiled by Bloomberg. This year’s issuance has mirrored the pace with $118.8 billion already raised by speculative-grade borrowers, Bloomberg data show.
“Will the search for yield come to tears?” JPMorgan Chase & Co. strategists led by Jan Loeys wrote in an April 25 report. “Eventually, yes.” But not, at least, until probably next year, according to the strategists, who maintain a positive outlook for now on U.S. speculative-grade debt.
While the overall weakening of credit standards is “a disturbing trend, I don’t see anything in the course of the next year or so” to disrupt it, Scott Minerd, global chief investment officer for Guggenheim Partners LLC, said in an interview. “Bull markets don’t die of old age. They die of exogenous events.”
Investors have flocked to leveraged loans and other forms of credit as the Fed keeps interest rates near zero. Cheap money driven by the central bank has resulted in high prices for companies, keeping private-equity firms such as Apollo largely on the sidelines. Leveraged buyouts worth more than $500 million are, on average, valued at 9.5 to 10 times companies’ Ebitda in the U.S. and Europe, said Black.
“It’s still, in our view, not a robust environment for private equity,” said Black, adding that he doesn’t believe interest rates will rise before 2015. “Lower interest rates mean very full prices. It’s still a better time to sell than to buy.”
Black, Rowan and Josh Harris founded New York-based Apollo in 1990. The firm in January finished gathering $18.4 billion for its eighth buyout fund, the largest private-equity pool raised since the financial crisis.