(Bloomberg) -- Companies are grappling with far higher levels of debt than they were during previous periods of monetary tightening — and tackling this will be a real test, according to Paul Horvath, chief executive officer at Orchard Global, an alternative asset manager. 

Speaking at the Milken Institute’s Middle East and Africa Summit in Abu Dhabi, Horvath said that while the financial system looks more solid than the last time rates were this high, corporates are far more levered due to private equity firms buying up companies with cheap debt. And while he doesn’t believe a global financial crisis is on the cards, he anticipates a starker divide between winners and losers.

“The whole market and companies have been living in this la la land, this fake world of wealth of quantitative easing where you can borrow at 1% or 2%, you can buy anything, you can make lots of mistakes and you’re not going to get called out,” he said. “Winter is coming and I don’t think people have enough parkas.”

Dealmaking activity hit record levels during the pandemic era, when interest rates were at rock bottom and major central banks were pouring unprecedented levels of stimulus into the market. This led to a surge in private equity buyouts, which are typically backed by leveraged finance; debt that is loaded onto the target company. Now, a significant chunk of that borrowing is coming due and a large maturity wall looms over junk-rated firms globally. 

Pressure Building

SLR Capital Partners co-founder Michael Gross, speaking at the same event, said that securing the financing necessary to tackle these obligations will put pressure on companies — and there were no easy solutions in sight.

“It’s going to take more than public markets coming back,” he said. “It’s going to probably require private equity sponsors to find unique solutions like putting in more equity or finding preferred investors to step into the capital structures.”

Managing portfolio companies whose debt structures are now outdated will also be a challenge for private credit funds. Gross added that previous funds were structured for “perfection” — based on growth and low interest rates — but now both premises are absent.

Christopher Taylor, head of private credit at Third Point, said that this will be a test for personnel. 

“A lot of the people that we work with and partner with haven’t lived through multiple cycles. So it’s going to be a learning experience,” he said. 

As a result, while the credit market is fundamentally in good shape, there could be a higher level of defaults — albeit from a low base — as the economy slows, according to Anne Walsh, chief investment officer of Guggenheim Partners Investment Management. 

“We actually haven’t had a real corporate credit cycle since the early 2000s,” she said. “There’s a purge that’s going to happen.”

Walsh added that the regional banking crisis in the US, which began with the collapse of Silicon Valley Bank at the start of this year, could rear its head again. 

“The inverted yield curve has made it very challenging for them to operate,” she said

Read More: Guggenheim’s Walsh Plays Defense With Credit ‘Next Shoe to Drop’

--With assistance from Francesca Veronesi.

(Adds quote from Christopher Taylor of Third Point. An earlier version corrected the spelling of Paul Horvath’s name in the headline, first and second paragraph)

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