BlackRock’s direct lending boss sees rise in companies showing stress

BlackRock’s head of global direct lending has seen an increase in companies showing stress across the sector but still expects defaults to remain low.

At the asset manager’s 2025 Outlook EMEA Media Roundtable this week, Stephan Caron said “there’s no denying we’ve seen an increase in companies with stress”.

However, he added that he expects default rates to increase only slightly, using the example that a well-constructed portfolio may see the percentage of losses increase by 10 basis points while still generating 12 per cent returns.

He also expects covenant ratios to improve next year.

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Caron said stress in a direct lending portfolio usually comes from three areas: cyclical sectors, companies that took on a lot of debt in a low-rate environment and idiosyncratic situations.

He said the percentage of ‘watchlist’ names in BlackRock’s portfolio is between five and eight per cent but highlighted that watching these positions and liaising with the companies does not necessarily mean they will result in losses.

Amid fears of a turn in the credit cycle, Caron said that BlackRock does not expect a recession in the US and made the point that Europe has not seen much growth for a decade anyway.

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Looking at Europe, he cited the benefits of defensive sectors such as healthcare, tech and professional services, where he is seeing an uptick in activity.

“A lot of financing is related to fragmentation,” he said, noting the benefits of consolidation in a low-growth economy.

“From an income perspective, spreads have stabilised,” he added.

“We saw some spread compression this year but expect that to stabilise in 2025.

“You can still get double-digit returns on senior secured direct lending.”

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