The economy is only beginning to feel the effects of higher interest rates around the globe, according to Apollo Global Management Inc.’s James Zelter, who says he’s “skeptical” policy makers will achieve a soft landing.
(Bloomberg) — The economy is only beginning to feel the effects of higher interest rates around the globe, according to Apollo Global Management Inc.’s James Zelter, who says he’s “skeptical” policy makers will achieve a soft landing.
While delinquencies and defaults are beginning to rise, many consumers and companies that borrowed at ultra-low fixed rates have yet to refinance since the Federal Reserve began tightening monetary policy, the Apollo co-president said at the Bloomberg Global Credit Forum in London. The asset management firm, which runs about $617 billion, has one of the biggest private credit businesses in the world.
“The transition mechanism which the Fed would like to see in slowing down the economy that we have all expected has taken a lot longer,” he said Thursday in an interview with Bloomberg Surveillance at the forum. “The real impact of higher costs around the globe, in the US and Western Europe, it’s not been felt yet, and so when people say we’re going to have a soft landing, I am skeptical.”
Zelter’s comments highlight the angst investors have been feeling since the Fed last year began an 18-month string of rate increases, ending more than a decade of easy money. The US central bank this week signaled rates will remain higher for longer than some investors anticipated as policy makers try to bring inflation down.
The risk for lenders is that companies and consumers will struggle to repay or refinance at a time when economic growth is slowing.
Some signs of stress are already beginning to appear on company balance sheets. Akshay Shah, chief investment officer of distressed-debt fund Kyma Capital, which focuses on the European mid-market, said he’s seeing three times as many opportunities than he did at this time a year ago.
Read more: Apollo’s Zelter Sees Commercial Real Estate Lending Opportunity
“If you have floating-rate bank debt, that transmission mechanism is pretty immediate,” he said. “If you’ve got fixed-rate debt, you’re going to have to refinance your bonds. The European market has done a pretty poor job of refinancing out their maturities.”
Meanwhile, Apollo is trying to navigate the effect of higher rates by making senior loans to bigger, higher-quality companies, Zelter said.
Little Stress
Some credit executives say they’ve been surprised at the lack of stress so far among corporate borrowers.
“Sectors that you would have thought would have been leading indicators of a slowdown in the economy like leisure spending, travel, air, are actually doing surprisingly well,” Grishma Parekh, a managing director at private credit firm HPS Investment Partners, said during a panel discussion at the forum. “The economy has been surprisingly resilient.”
The effects of higher rates have been slow to unfold in part because many companies were able to borrow on loose terms, which now gives them more time to deal with their problems, Hamza Lemssouguer, chief investment officer and founder of credit fund Arini, said on the same panel.
In any case, the cycle is turning out to be a slow grind as higher rates filter through the economy, as opposed to the dramatic seizing-up of financial markets during the global financial crisis and the pandemic. So far, policymakers have reiterated that rates will remain restrictive for as long as needed to bring inflation under control.
“It is going to be slow because central banks cannot intervene in the same way they have in the past,” said Lemssouguer. “We think that this cycle is going to be very different to anything we have ever seen before.”
(Updates with context on central banks in second-to-last paragraph.)
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