13 Jan 2022
Investcorp, a leading global alternative investment firm, today released its quarterly house view on the state of global credit markets. The report analyses recent performance, headwinds and tailwinds behind US and European credit markets, providing a broader outlook of key expectations for the first quarter of 2022 and beyond.
Investcorp Credit Management is bullish on the outlook for the leveraged loan market in light of strong demand for the asset class.
“We strongly believe that through careful portfolio construction, in particular, a focus on larger-cap issuers and avoidance of high inflation risk sectors, along with active portfolio management, we can position our leveraged loan portfolios to cope with inflationary impacts while benefitting from potential rate rises,” said Jeremy Ghose, Managing Partner and CEO of Investcorp Credit Management. “Overall, we expect 2022 to provide compelling investment opportunities for our Funds. Given our market position, we believe that we are well placed to continue to benefit from the well-priced primary issuance we have seen recently and to use this to rotate portfolios to increase yields.”
Key insights highlighted in the report, include:
- Investcorp expects the global environment for credit to remain favorable throughout the coming quarter.
- Given the benefits of rate rises on leveraged loans, the market is already seeing increases in demand with the US market seeing $26 billion of retail and mutual funds inflows in the 9 months ended 30 September 2021.
- From an asset perspective, global large-cap leveraged loan markets are generally well positioned to continue to perform well in inflationary conditions. Rate increases, despite being beneficial for returns, also create additional risk from increased borrowing costs over the medium term which may lead to additional credit risk across markets. Investcorp’s view is that this would also tend to favor large-cap issuers over smaller cap issuers.
- Both US and European CLO new issuance markets are heading towards relative record issuance levels.
- On the heels of 2021’s record issuance, we expect another year of robust leveraged credit issuance in 2022 driven by M&A activity and borrowers managing the transition to SOFR.
- We are focused on industries and individual credits with less degree of vulnerability to wage and input cost inflation, supply chain disruption, margin pressures and higher interest rates. We also are focused on credits that enjoy strong secular growth tailwinds and exhibit pricing power that can offset inflation pressures.
- European credit markets seem set for a positive start to the year driven by ultra-low default levels and increasing credit spreads as the supply/demand imbalance seen over 2021 corrects.
David Moffitt, Co-Head of US Credit Management at Investcorp added, “The US credit market benefited from similar tailwinds to its European counterpart last year. Credit spreads are near decade lows reflecting strong fundamentals, the benign outlook for defaults and strong demand for leveraged loans from CLO origination. We continue to look to drive value and outperformance in our strategies through an increasingly active trading and portfolio management approach, rooted in fundamental analysis, focused on identifying opportunities for capturing total return and convexity. We see the potential for increasing inflation and corresponding policy adjustments as potential challenges in 2022.”
Philip Yeates, Head of European Credit Funds at Investcorp commented, “The European credit market continued to exhibit high levels of resilience in Q421, culminating in another year of record issuance. From a credit risk perspective, our focus remains on the potential impact of inflation across the market. However, we expect the issuers we target within the European market to remain resilient in the face of inflationary headwinds given their relative size. We expect that 2022 will deliver more opportunity to diversify risk and rotate our portfolios in order to increase yields.”
Investcorp Credit Management is a leading global credit manager with over $14 billion in assets under management, a more than 16-year history of investing across global credit markets and is comprised of 40 seasoned investment professionals with its senior team averaging more than 20 years of industry experience.