Still Golden
Default rates for High Yield Bonds, Broadly Syndicated Loans in U.S. & Europe have likely peaked. As the Federal Reserve & ECB embark upon its path to lower interest rates, debt service relief is around the corner. I believe we have seen the cycle high for defaults and in the coming months default rates will begin to trend lower. Corporate earnings have proven resilient and speaking for most companies who have survived or thrived through the most challenging rate environment in recent memory, the skies look clearer. What is true for Public Credit will also prove true for Private Credit as Direct Lending will experience a similar trend. In this cycle, High Yield Bonds have faired much better vs. Broadly Syndicated Loans when calculating default rates. In contrast, price performance of BSL outperformed its fixed coupon counterpart in thanks to shorter duration plus ~200bp coupon advantage for BSL v. HY bonds (given the shape of the yield curve/SOFR). Recovery rates are also inching higher as well.
Telecom, Pharma, Media, Packaging, Business Services, Software represent sectors where overleveraged companies have had to address their heavy debt loads. Capital Solutions have been a blessing for many equity holders in these industry sectors, especially for issuers who negotiated flexible documents and weak covenants, a condition that has benefited the equity at the expense of certain creditors who become structurally subordinated, allowing new money creditors to step to the front of the line. Despite a positive outlook for HY credit, there is still ample opportunity for opportunistic investors.
I expect LBO transactions to pick up as rates decline and the new issue calendar to become robust in the coming months. Marathon Asset Management is seeing robust deal flow across our private credit origination platform and it’s my expectation that Direct Lending will continue to post impressive results in 2025, just as it did in 2023 and 2024. With the credit cycle turning more positive, the Golden Era of Credit is alive and well.
I have three suggestions: Allocate, Allocate, Allocate. |
