9fin: You’ve worked at a variety of sponsors and banks throughout your career. What structural changes have you seen in European credit markets since then and how has it affected your approach?

Over the past decade, European credit markets have experienced an increase in scale, transparency and efficiency. We have witnessed a tremendous amount of growth in the high yield and leveraged loan markets in Europe, in concert with global growth and bank balance sheet reduction to sub-investment grade credits. Restructuring and bankruptcy regimes have continued to become more efficient across a number of jurisdictions in Europe, and that has driven the need for capital around those processes. There has also been an increase in the preservation of capital and going concerns, which we expect will continue to contribute to the stability and growth of the credit markets.

9fin: When do you expect the extended primary pause to cease and what is your team focused on in the meantime?

Primary markets are still active, albeit in smaller doses than we have been accustomed to over the last few years. The high yield market has had a slower start than the loan market, but activity continues. We do see some thawing and engagement from underwriters and sponsors, so we expect to see some pick-up over the medium term. In the meantime, there is no shortage of activity to monitor in the secondary market and on individual credits. In general, our team chooses to focus on relative value and trade opportunities.

9fin: Are there any principles that you follow when investing?

Ares is generally a bottoms-up fundamentals-focused credit investor. We tend to be more defensive in nature, given the asymmetric risk associated with credit investing. We use the power of our broader platform to make the most informed decision possible when analysing any credit for investment and given our flexible capital approach, we remain patient and consider structure and relative value when making investments. ESG also plays an important role in our investment process, so we have certain industry exclusions to consider as we source potential investments.

9fin: What are investors in credit portfolio managers currently focused on? Has the way they choose managers changed in recent years?

There are a wide variety of investors within the credit portfolios so their priorities vary, but consistency of message and understanding of process continue to remain key.  We believe that transparency with investors leads to the best relationships and remaining consistent in our process provides the best results.

9fin: Has the Russia-Ukraine conflict affected the way you think about ESG risk and do you plan to make any changes to your portfolio beyond directly affected Russian assets?

The situation in Ukraine is deeply troubling and has given us all pause as we think about the impact on the global landscape. As it relates to ESG specifically, we actively began incorporating ESG practices into our investment processes nearly 10 years ago and we remain committed to enhancing our efforts across the Ares platform. Within liquid credit, we have had limited direct exposure to Russia and have predominantly focused on Western European and US-headquartered credits in our portfolio.

9fin: You serve as a member of the Ares Credit Group's European Liquid Credit and European Direct Lending Investment Committees. How do you approach the investment strategies differently? Do you think there's more value to be found through one or the other strategy currently?

We cross-pollinate our investment committees to bring added perspectives. In Europe particularly, the average borrower size in loans or high yield tends to be smaller than in the US, so there is definitely value in providing views across both committees. Typically, direct lending has a much smaller average borrower size than the liquid credit universe, so there are different considerations around investment in terms of growth trajectory, management and business sponsorship, as well as more dependence on a specific country or jurisdiction.

9fin: How will rising interest rates impact the leveraged loan market in Europe?

The rising interest rate environment in Europe has yet to cause any material impact on borrowers but does create a favourable technical for floating rate assets and leveraged loans as an investment. As 3M Euribor and the front end of the curve remain negative or close to zero, the Euribor floor still holds value while the market waits to see if these follow suit into positive territory. Ultimately, increased borrowing costs will impact issuers, but coverage ratios on our investments are generally strong and have significant cushion before we believe concerns arise.

9fin: CLO issuance fell during the first quarter of this year – what were the main drivers of this and what is the outlook for the remainder of the year?

Increased volatility across markets has played an important role in both slowing primary issuance as well as CLO issuance, given liability costs have increased and equity return expectations followed in concert. We have seen decent activity picking up over the last month as the arbitrage is starting to work again and warehouses are moving off of bank balance sheets. As stability returns to the broader markets and liability costs become more favourable, issuance should return to more normalised levels.

9fin: What are the differences between the market response to Covid-19 vs the Russian invasion?

The response to Covid-19 stemmed from an evolving situation with unknown consequences and duration, but it existed as a situation created from an unprecedented level of government lockdowns around the world. There were different responses from different market participants, but at Ares we looked specifically at company liquidity, business sponsorship and industry of operation as parameters to monitor. It was a global event with different regional responses, so it was an evolving situation. The sanctions as a result of the war in Ukraine presented a more quantifiable situation, as well as length of impact on energy and raw material costs. While our teams certainly continue to monitor the macro-level impacts of the war, the tragic humanitarian crisis remains at the forefront of our thoughts.