KBRA Financial Intelligence

3 Things in Credit: Inflection Point, Ares’ Perspective, and Maersk’s Beat

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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.

We tripped across “eight reasons to be hopeful” this week in the Guardian newspaper, compiled by one John Boswell. Usually, these kinds of articles are written when the opposite tends to be true. I’ll let you work through that equation.

In any event, here they are: We’re getting a grip on climate change; energy abundance is within reach; we are eradicating poverty; we are living longer than ever; medical breakthroughs are accelerating; robots will take our jobs (I’m not sure why that makes the list); a new space age is dawning; and last but not least, humans are incredibly resilient.

So, we’ve got that going for us. Which is nice.

This week, our 3 Things are:

1. Inflection point? July jobs was a shock, but does it really reveal something different?

2. Ares’ perspective. Insightful comments on the growth of private credit.

3. Maersk’s beat. What it says about global growth.

Alright, let’s dig a bit deeper.

Inflection point?

Wow, that certainly was unexpected. Speaking, of course, of last Friday’s jobs report. Not because you couldn’t see it coming. In fact, the employment report had become an outlier in terms of economic data, as the soft data and increasingly the hard data had mostly tipped toward slowdown. But because the Fed chair had continually, including last week, described the labor market as “solid,” Friday’s report came as a surprise. Now, to be fair, Chair Powell did add at the most recent FOMC meeting that risks to the labor market are to the downside. But at 4.2% unemployment, essentially full employment, his comfort level squared up with that of investors, who routinely ranked the state of the labor market down the list of things to worry about.

That’s changed. Now the hard data, virtually all of the hard data, fits the soft data. And, going back to Chair Powell’s comments last week, I don’t think investors are taking comfort in the fact that he sees unemployment being held down because both demand and supply of labor are declining. Regardless, you can now add the labor market to the broader slowdown narrative.

And, that narrative features not just slowdown, but also upward pressure on inflation. In a word, stagflation. While that’s been our base case, we do believe it is appropriate to add the qualifier “modest” to our stagflation scenario. That stands in contrast to what some are warning of, namely a recessionary stagflation. The risk of that scenario is not zero, but we still believe growth will remain above stall speed, call it 1.2% real GDP for the second half and full-year 2025.

On the inflation part of that outcome, the rise in prices paid in this past week’s ISM Services report suggests that what feels benign today is set to reverse course and move higher as tariff costs increasingly become evident. We believe that inflation pressure will develop (1) as the ability for consumers and businesses to maneuver ahead of tariffs diminishes, and (2) as that four- to six-month lag for tariffs to fully hit comes to a close. That lag stems from shipping, manufacturing, and policy implementation considerations. Be patient—don’t lose sight of what’s on the way. We would look for core PCE to edge above 3% by year-end.

It is worth pointing out that the revision of the government’s jobs data doesn’t figure to change all that much the behavior of consumers or businesses. The survey data—the ISMs, the NFIB small business, the Michigan and Conference Board consumer sentiment surveys, the Fed’s own Beige Book—all have pointed to slowdown. Yes, on the margin, the shock of job growth falling to 35,000 a month on a rolling three-month average basis, a level almost always associated with recession, will lean a bit more on risk-taking sentiment. But the hallmark of this cycle has been, “It’s different this time.” In this case, what’s different is the strong starting point that both consumers and businesses in the aggregate find themselves. And that should keep recession probabilities relatively in check.

Alright, on to our second Thing—Ares’ perspective.

We always look to Ares Management’s CEO, Michael Arougheti, for color on private credit, in part because of the scope and scale of his business, in part because the firm has been around for 30 years, and in part because of his candidness. It’s a good combination.

On Ares Q2 earnings call last week, Mr. Arougheti was asked about private credit’s credit quality and how the asset class figures to fare in this current credit cycle.

He is quick to push back on the notion that private credit is risky while public credit is not. For those market participants that have been subject to bank credit cyclicality over the decades, or consumer credit’s running amok leading up to the GFC, you could naturally, if somewhat naively, assume leveraged finance is super cyclical. Mr. Arougheti reminds that this business is different. He notes that senior loss rate at Ares historically is negligible. Why? Security. Loan to value in the U.S. direct lending book is around 43%. Interest coverage averages 2x. So, when asked whether direct lending has been “cycle tested,” Mr. Arougheti is quick to respond, “I take real issue with that.” So do we, as we wrote recently in our research piece, Private Credit: A Source of Systemic Strength. You can find that on KBRA.com.

In terms of this particular cycle, Mr. Arougheti points out that the quality of companies finding their way into private markets continues to improve. He also reminds that we’re coming off a vintage where equity contributions to levered capital structures are near record highs. That speaks to these low loan-to-values. He does not expect increased credit loss in this cycle.

He also points out the value proposition of a bilateral lending relationship, where the lender works proactively with its borrowers to mitigate loss through the cycle, as it is able to deploy a variety of restructuring strategies. He contrasts this to the public market, where in times of stress the risk to borrowers is someone “accumulates loans or bonds at a discount and then tries to take your company away from you.” That gets at the concern some have when thinking of private credit, that the lender is subject to adverse selection because companies pay up to borrow. The reality is that there is an economic reason why a borrower would pay up to enter a bilateral lending relationship.

And finally, Mr. Arougheti points out that with most private credit funds unlevered or lowly levered, market volatility is dampened. That improved shock absorber is also something that we highlight in our research report. Have a look. It refutes many of what we see as unfounded concerns surrounding private credit.

Alright, on to our third Thing—Maersk’s beat.

Maersk, the Danish shipping giant that serves as a bellwether for global trade, reported Q2 EBITDA of $2.3 billion, 15% better than the consensus estimate and 7% better than the year-ago level. Revenue grew 3% year-over-year.

What was surprising to us was that management raised their full-year 2025 EBITDA guidance to between $8 and $9.5 billion from $6 to $9 billion based on an improved outlook for global trade. The company now expects global container volume to grow between 2% and 4% in 2025, up from a previous forecast of between -1% and 4%.

Management spoke to what it sees as the continuing decoupling between global GDP growth and demand for container shipping. The company attributed the improved outlook to China’s increased share of manufacturing over the past couple of years. And notwithstanding the disruption in U.S./China trade flows due to tariff uncertainty, Chinese exports actually grew 7.2% year-over-year in July. That is driving higher demand for shipping and creating a favorable pricing environment for Maersk. To that end, spot rates rose during the quarter 37%. Shipping demand is up across the globe with the exception of the U.S. as a result of tariff-related disruption.

Management reminded that 85% of container traffic is not to and from the U.S. That serves as a useful reminder, a useful grounding, that the global economy is relatively resilient to the volatile trade policy adjustments coming out of Washington. And that bodes well for credit.

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

1. Inflection point? July jobs may have been a shock, but the correction fits into the well-defined slowdown narrative.

2. Ares’ perspective. Private credit at scale and appropriately disciplined is built to hold up relatively well through the cycle.

3. Maersk’s beat. Global growth is powering ahead.

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