(Bloomberg) -- TCW Group Inc. Chief Executive Officer Katie Koch said she expects higher defaults in the $1.7 trillion private credit market, but that she doesn’t see a bubble as investors are still willing to trade liquidity for yield.  

“We know there’s going to be demand for private credit, because there’s demand for people to pick up some spread for sacrificing liquidity,” Koch said Tuesday at the Bloomberg Invest conference in New York. 

Still, Koch expects defaults to rise in the next two years, primarily due to lax covenants and because people put capital structures in place with the expectation that interest rates would remain near zero. Now that rates have risen sharply since March 2022, she said, “math is taking over.” 

Meanwhile, Oaktree Capital Management Co-CEO Robert O’Leary said that private credit is better underwritten than the syndicated loan market, which he called the “locus of the most egregious stuff that happened.” 

“I’m not sure everybody is fully aware how bad it could get, with some of the documents that have been put in place,” he said, referring to terms in loan agreements. 

O’Leary added that he expects to see a “tremendous level of liability management” over the next 18 months amid a combination of “bad documents” and aggressive fund managers. 

“You’re getting to the point of no return, especially for a couple of these floating rate structures, where they’re bridging themselves by issuing more debt,” he said. “And at some point, even if rates go down, they’re not going to be able to to be recovered.”   

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