Leveraged debt financing: Is there a debt crisis in the making?

By Atanas Dimov, Head of Credit Risk, Aviva Investors

Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I am currently the Head Of Credit Risk at Aviva Investors, with global responsibility for the management of risks arising from illiquid Investments as well as derivative, liquidity and other counterparty transactions. I provide oversight over the origination and portfolio management of transactions across leveraged finance, other private corporate debt, real estate debt, infrastructure debt, structured finance and infrastructure equity.

Prior to joining Aviva Investors in 2016 I spent 12 more years in financial services covering origination, portfolio management and credit risk across leveraged finance and infrastructure debt as well as in audit. I am a qualified Certified Public Accountant in the state of Massachusetts, USA.

What, for you, are the benefits of attending a conference like the Risk EMEA 2019 and what can attendees expect to learn from your session?

The conference provides ample opportunities to hear about the latest trends and best practices in term of financial risk management. I hope that I will be able to implement some of these insights into my current role. The conference is also a great networking event.

I aim to present the latest credit risk trends for this very exciting, dynamic and popular asset class which is seeing more and more fund inflows as a result of investors chasing yield. The attendees will also obtain a good picture as to how the much bigger and more liquid US market influences European transactions.

Your presentation is on leverage debt financing and whether there is a crisis in the making – how likely is this and why? Please describe the increased levels of credit risk and the outlook for load default?

There has been for a number of years speculation about a collapse in the leveraged debt market; however, such an event has not materialised yet. People argue that we might be at the top of the market, although there is no clear evidence as to the direction of the market trajectory. Market specialists (rating agencies, consultants) do not forecast an avalanche of leveraged debt defaults in the near future, something that is further supported by the present benign global economic environment.

However, risks remain and the prospects of higher interest rates, central banks’ asset purchase tapering, trade wars, geopolitical conflicts and Brexit should not be underestimated. Ever more aggressive financing structures are also a cause for concern despite regulatory attempts in the US and Europe to reduce such risks.

A lot is mentioned in the media on international and political tensions, what are your views on this on credit risk?

Geopolitics and country politics usually have a pronounced impact on economic development and markets, resulting in lower growth and higher market volatility. That inevitably impacts credit risk, especially in regions where external conflicts and / or internal political infighting are present.

What would you consider the future outlook of NPLs on the balance sheet?

It is difficult to generalise given that NPLs would be driven not only by market factors but also by balance sheet strategy and investment selection. As already mentioned above, market specialists do not expect a significant increase in defaults in the near term.