KBRA Financial Intelligence

3 Things in Credit: Blackstone Earnings Blowout, GDP Miss, and Default Forecasts

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

Kicking things off, here is the least surprising viewpoint on this week’s FOMC decision, as captured in an FT headline: “Trump lashes out after Federal Reserve keeps interest rates steady.” Recall that at Davos, the president let the world know, via larger-than-life video, that he is demanding that interest rates drop immediately. I guess Chair Powell did not get that message. OK, then—over to you, Scott Bessent!

This week, our 3 Things are:

1. Blackstone earnings blowout. What’s the read across?

2. GDP miss. Peel that onion and you’ll find some good and some not so good.

3. Default forecasts. Our own Eric Rosenthal will tell you where we’re headed.

Alright, let’s dig a bit deeper.

Blackstone earnings blowout.

The largest alternative asset manager in the world is back hitting on just about all cylinders, with solid returns in private equity, private and liquid credit, and multi-asset investing. Real estate, representing 19% of capital deployed, was the lone laggard. Overall, inflows, investment activity, and realizations hit their highest levels in 2.5 years. Distributable earnings jumped 56% year on year, driven by record fee-related earnings.

The results are important because of the read across that Blackstone provides into the health of the broader economy, credit markets, as well as the effectiveness and efficiency of the financial system. From our perspective, the U.S. financial system—decentralized and markets-based, public and private, bank and nonbank—is the world’s best at getting capital to its most productive use. It’s not perfect, it is difficult to regulate, but it beats the alternatives. And the rise of private markets, private credit in particular, have built a much-improved shock absorber compared to the banks, which in times of market stress cede control to its regulators, and their differently aligned motivations.

Alright, on to the points made on the earnings call, where there is insightful read across.

As for the backdrop, CEO Schwarzman stated that “we’re moving into an environment where we see consequential tailwinds for our overall business.” He addressed two headwinds, inflation and policy uncertainty, and gave comfort on both—saying with respect to inflation, that “based on our expansive portfolio and our proprietary data, the U.S. is continuing on a path of disinflation, albeit at a more moderate pace than before.” In terms of policy leanings of the new administration, they believe “the direction of travel fundamentally is toward policies that are pro-growth and pro-deregulation, which ultimately should be quite positive for our business.”

President Jon Gray summed up the quarter this way: “The combination of a healthy U.S. economy, historically tight financing spreads, greater debt availability, the prospect of a more business-friendly regulatory climate, and importantly, accelerating technological innovations have given us confidence to deploy capital at scale.”

He provided interesting color once again on the illiquidity premium in private credit, highlighting that the firm “placed or originated $46 billion of A-minus rated credits on average for our private IG-focused clients in 2024, up 38% year-over-year, which generated nearly 200 basis points of excess spread over comparably rated liquid credits.”

Finally, he addressed real estate, which has struggled under higher interest rates, a stronger dollar, as well as secular changes in the industry, most notably in office buildings where valuations have come down 50%-70% from their peak. A year ago, the firm said real estate values were bottoming, but the recovery would take time. A year later, they are “firm believers” that a sustained CRE recovery is underway. They point to debt markets that are vastly improved, new supply is down dramatically, while demand has been resilient. And they continue to deploy at scale.

Alright, on to our second Thing—Growth slip.

We’ve grown accustomed to better-than-expected, strong economic growth. Using the Fed’s estimate, 1.8%, for longer-run growth in real GDP, we see that over the past 10 quarters, growth has exceeded that nine times, averaging 2.9%. We continue to remind folks that this is not normal. This is the result of surging wealth, driven first by unprecedented fiscal and monetary accommodation and more recently by inflated values in investment and residential real estate markets.

So, today’s print for Q4, 2.3% versus the estimate of 2.6%, caught my attention. By the way, congrats to the Atlanta Fed and its GDPNow model, which called the outcome. Interestingly, for much of December, the Atlanta Fed’s dynamic estimate for Q4 was north of 3%.

Underneath the headline number, we find that the 4.2% jump in consumer spending essentially drove all of the increase and likely impacted inventories, which experienced a significant drawdown. Some have speculated that the growth in consumer spend might be households anticipating tariffs and pulling forward durable goods purchases. My own view is that only an economist could come up with such tomfoolery. I don’t know what kind of crowd you’re hanging out with, but in my circles exactly no one has pulled forward purchases to get ahead of tariffs. In any event, the consumer continues to spend, maybe they too are driven by animal spirits post the election.

More worrisome is a 0.6% drop in private fixed investment, the first drop since Q4 2022. Within this category, business capex fell off the table, down 7.8% from the prior period, although this was probably impacted by the Boeing strike. Excluding aircraft, investment in equipment still fell 2.4%. A bright spot was homebuilding, which bounced to the positive at 5.3%, although the recent rate rise will likely dampen that trajectory in Q1.

While a growth-fueling inventory rebound might be in the offing for Q1, we’re not so sure the consumer strength will remain as robust. Wage growth is slowing, credit availability for lower income households is tapping out, consumer confidence is slipping, and the “no buy 2025” movement is apparently taking root, or so say influencers, according to Google.

Pulling it all together, our view is that we are slowing back to normal, although we do expect some bump to growth in 2025 due to Trump’s deregulation push and the unleashing of animal spirits. Nevertheless, higher-for-longer rates are leaning on interest-sensitive sectors, most notably housing, and wage growth is slowing. Still, this remains a highly constructive backdrop for credit heading into 2025.

Alright, on to our third Thing—the 2025 default rates update from KBRA Analytics.

Joining me is Eric Rosenthal, who tracks defaults across high-yield bonds, broadly syndicated loans, and private credit. Eric generates our default forecasts as part of his work with KBRA DLD, our direct lending news and analytical platform. Eric, welcome back to the podcast.

Eric: Thanks, Van. Excited to be back.

Van: Before we get to your 2025 forecasts, what was the most surprising result from 2024?

Eric: I was shocked that broadly syndicated loan default volume topped 2009’s record, eclipsing $82 billion.

Entering 2024, I expected default volume would exceed high yield and by the biggest margin ever, by $20 billion—well, that ended up at $58 billion.

While the vast majority of loan issuers defaulting were forecasted, there were some projected either for smaller amounts or were expected to occur in 2025. This resulted in 2024’s 5.6% dollar rate, above the initially anticipated 4%.

As a comparison, high yield landed at 1.7%. While this was lower than the originally projected 3%, we frequently discussed how a sub 2% path was obtainable, so on that front, not a surprise.

Van: Eric, it’s counterintuitive that BSLs’ default volume topped 2009’s. What’s driving that?

Eric: True, the economy was better than expected, but the higher cost of capital resulted in reduced liquidity that exposed and tested both deficient business models and inappropriate capital structures.

Van: Any other interesting developments from 2024?

Eric: You mean besides your Eagles defense outperforming? How about high yield average implied recoveries ending up a smidge higher than broadly syndicated loans. This bucks the historical trend of high yield finishing roughly 20 points lower than loans. These results feel more like an outlier though, due to a relatively small sample size combined with numerous distressed debt exchanges, which typically have higher recoveries than bankruptcies or missed interest payments.

Van: Let’s turn to direct lending, which made headlines all year. Default rates continue to be well behaved, despite all of the capital flowing into the space. Walk us through why you think that has been the case.

Eric: The 2024 direct lending issuer default rate stands at 1.9% but won’t be locked until BDCs report Q4 results over the next several weeks. We are anticipating several defaults via restructurings, which could put the rate real close to our 2.75% projection.

You’re right, direct lending has performed well. We attribute this to stronger lender protection—documentation, covenants—and active management by lenders.

For 2025, we forecast a 3% rate. This slight uptick reflects a growing list of borrowers on Default Radar and a slight easing of fair value marks in our Index. The Radar has grown significantly and now accounts for nearly 8% of the KBRA DLD Direct Lending Index. Furthermore, overall fair value marks slid roughly 30 basis points over the past year.

Van: Understood, how do direct lending implied recoveries look for 2025?

Eric: We believe that implied recoveries will fall slightly, landing at roughly 48%, down from 53% in 2024. The lower projection is based on an average fair value mark of 58% for Red issuers on Default Radar. These same issuers were 10 points higher six months ago, and that downward trajectory should continue as defaults eventually happen.

Van: Turning back to liquid credits, how do you view broadly syndicated loans in 2025? Could we be looking at another default record?

Eric: No, I think we are safe from even approaching last year’s record. We are calling for $58 billion of volume—that equates to a 3.75% rate. That total is more in line with the 2020 and 2023 amounts than from 2009 and 2024. The rate drop reflects a reduction in Red loans on Default Radar. From a count standpoint, we anticipate roughly 63 defaults compared with 86 in 2024.

Van: High yield is that still low in 2025?

Eric: Yes, we project roughly $32 billion of default volume, which equates to a benign 2.25% level. While that is higher than last year, that is below the historical levels.

In fact, the potential for the rate to mirror last year’s 1.75% rate is in play. The reason: There were only 21 issuers on our Red list entering this year, and those with the largest outstandings will likely engage in smaller-sized DDEs.

Van: Finally, any new developments from your team?

Eric: Yes! Two big developments in two markets.

First, in direct lending—we now publish the dollar default rate by volume.

Second, in BSL—we launched the KBRA DLD Leveraged Loan Index. Noteworthy is that outstandings are nearly $1.5 trillion across 1,200 rated issuers.

Van: Great! so I have to ask: What’s your 2025 default forecast for direct lending by dollar?

Eric: We forecast a 1.25% rate by volume for 2025, down from 1.8% in 2024 (pending additional Q4 restructurings). Keeping in mind, Pluralsight drove the dollar rate in 2024. While we forecast more 2025 defaults, none have BDC holdings in the Index that equal even half of that issuer.

Van: Great. Remind our listeners where they can find your research.

Eric: Follow KBRA DLD on LinkedIn to receive our defaults weekly in your inbox—or to access all our reports on liquid credit and direct lending, contact Niki Masino at [email protected]

So, there you have it, 3 Things in Credit:

1. Blackstone blowout. The backdrop to credit is highly constructive.

2. GDP miss. The falloff in capex is worrisome, but the consumer remains powerful in the aggregate.

3. Default forecasts. A still strong economy should keep defaults well behaved.

As always, thanks for joining. We’ll see you next week.