Borrowers face funding trade-off as PIMCO flags debt market cracks

PIMCO Chairman Christian Streak is excited on the asset-based finance segment of the private credit market, but corporately warns of “rift” in giving direct lending, which creates bulk in the region.

Speaking with CNBC’s Chera Kang at the annual Milken Asia Summit in Singapore in Singapore on Wednesday, Streak exposed the widespread difference between the two borrowed areas.

“there are problems [in corporate private credit] Where the borrowers are going to their lenders and saying, ‘Can I no longer pay you cash interest, but basically borrow interest from you and pays later?’ This is called payment-in-in [PIK]And it is quite popular right now, “Strack said.

He referred to the asset-based financing as a “very healthy” credit environment.

He said, “Asset-based financing-residential mortgage, consumer loans, student loans and auto debt-economy is strong, the house is strong, the consumer is strong, and we are not really looking at the cracks in that way,” he said.

A wide gap stems since the global financial crisis of 2008, which saw that consumer borrowers have removed their borrowings and their domestic balance sheet, which has helped promote asset-based financing activity. Corporate borrowers, on the contrary, have created their own leverage and are “less clean” balance sheets.

In October last year, Pimco raised more than $ 2 billion for asset-based characteristic financing strategy as part of its constant push in private credits.

According to Strake, corporate borrowers also face trade-off in public versus private debt markets.

The small number of lenders in private markets means that it can be easier for borrowers to re -organize the terms of debt in case of loan pressure – with high costs.

On the other hand, more liquid bank loans come at a very low cost, although the refinance process may be complicated.

“This is more difficult with a widely syndicated bank loan or bond,” Strack said. “We are looking at some real problems in credit markets. There have been some high-profile lapses in credit markets in public markets-where it is very difficult for the company to interact with lenders to preserve the price in the company.”

Further, Strack said that as the Federal Reserve continues on its route to the interest rate cut, and the total cost of the loan decreases, especially in mortgage rates, there will be more opportunities to take advantage of that demand for credits for Pimco.

Meanwhile, Australian Supernation Fund Hostplus CEO David Elia said that institutional investors have been rapidly designed in place of private markets in search of portfolio diversification – but said that regulation should be focused on retail wealth.

Elia told CNBC at the Milken Asia Summit that any push for the hard regulation of private markets should concentrate around “mom-end-dad” investors, which are attracted to the diverse benefits of the asset class rather than sophisticated institutional investors.

“There are probably around 19,000 companies listed in global markets. There are 140,000 private companies that generate more than $ 100 million in US revenue,” said Elia.

“As long-term institutional investors, you will not see the level of concentration, if you are real about diversification in the listed markets. Therefore, it is going to drive you to the unrestaded sector, around the large-scale private equity-style investments.”

He also predicted more IPOs in the coming months.