News

Investcorp Releases Inaugural “House View” on Credit Markets

19 Jan 2021

Investcorp today released its inaugural “House View” on the state of global credit markets. The report analyzes the recent performance of US and European credit markets and provides an outlook for key expectations in 2021.

“Credit markets once again demonstrated their resiliency in 2020, staging an extraordinary recovery following the market rout last March and highlighting the need for disciplined and active portfolio management,” said Jeremy Ghose, Global Head of Investcorp Credit Management. “Overall, defaults have been focused on sectors most negatively impacted by COVID-19 and have been offset by significant fiscal and monetary support. Looking ahead, we expect there will continue to be significant volatility across markets, but we also believe that this will create opportunities for skilled active managers to capture value as portfolios are rebalanced amidst the recovery.”

Key insights highlighted in the report, include:

  • Global economic momentum slowed during the fourth quarter of 2020 due to rising COVID-19 cases, but the impact has been more limited compared to the initial lock-down in the spring of 2020.
  • US and European markets have been significantly “risk-on” following the November vaccine news.
  • In US credit, high yield spreads tightened over 140 bps over the final two months of the year with yields recently sitting at an all-time low of 4.57%.
    • U.S. high yield returned 5.48% in 2020. Leveraged loans returned 2.78% in 2020, an exceptional recovery from the (19.76%) YTD returns at the March nadir.
  • Credit fundamentals and loan market technicals remain strong in the US. The market technical continues to be supported by strong CLO formation, an increasing pace of prepayments, a restrained supply of new issue loans and expectations for continued Fed support and fiscal stimulus from the new administration.
  • European leveraged loans have extended their nine-year record of positive annual returns in 2020 and are poised to benefit from several technical tailwinds, including: a pronounced structural supply deficit, led by subdued primary issuance and continued new CLO issuance.
  • However, European market fundamentals are facing significant pressure and uncertainties from the COVID-19 pandemic and the related lockdown measures to contain the virus.
    • The report predicts European default rates will remain relatively elevated through 2021 and the over reliance of European markets on Central Bank stimulus poses significant medium-term risks as the support is eventually reduced or removed.

Philip Yeates, Head of European Credit Funds at Investcorp commented, “While we are encouraged by the improving overall macro outlook and credit fundamentals entering 2021, we recognize the various challenges and uncertainties that could emerge and lead to periods of volatility. Our European portfolios have been conservatively positioned but we also intend to take advantage of short-term windows to rotate positions and capture value. We remain focused on continuing to identify attractive investment opportunities where we have high conviction in the business quality, liquidity and post-pandemic recovery prospects.”

“We expect improving credit fundamentals and decreasing default rates in the US as the economy recovers from the pandemic resulting in credit spreads tightening further,” said David Moffitt, Co-Head of US Credit Management at Investcorp. “We further expect loan issuance to increase from depressed levels in 2020 driven by a significant recovery in M&A and LBO activity. Demand for loans will be driven by a strong anticipated recovery in CLO issuance and by high yield crossover buyers drawn to relatively attractive loan yields and the rate protection afforded by floating rate assets.”

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.