27 Apr 2021

Investcorp today released its second quarter “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 for key expectations for Q2 2021 and beyond.

“Global credit markets continued to demonstrate their robustness throughout the first quarter of 2021 as the speed of economic recoveries accelerated”, said Jeremy Ghose, Global Head of Investcorp Credit Management. “Unleashed fiscal power supported by loose monetary policy can be a potent growth cocktail, but it also naturally induces questions over the outlook for inflation. Looking ahead, we expect a near-term surge in demand, fueled by excess savings and strong income growth, that will meet a supply side still scarred by the effects of the pandemic. This imbalance should push the inflation rate in the US above 3%, whilst in Europe, a larger output gap and a tighter policy mix points to a conservative reflationary impulse”.

Key insights highlighted in the report, include:

• In the current period of rising rates and inflation, senior loans are an attractive asset class given their low duration and floating rate nature and should outperform in Q2
  • Investors have been seeking short duration or floating rate alternatives to corporate bonds
  • We’ve seen increased buying from high yield crossover accounts and expect increased demand for leveraged loan assets through 2021
• In Q1 2021, US credit markets have embraced expectations for a strong economic rebound fueled by macro tailwinds, although rates and inflation concerns are creating pockets of volatility
  • Rising rates have benefited the loan market over high yield and investment grade credit
  • Leveraged loans provide investors with an option to maintain yield while reducing rate and duration risks and have outperformed HY bonds YTD
  • During Q1 2021, gross CLO issuance was over $106bn, which is the highest quarterly amount on record
• European markets have remained “risk-on” in Q1 2021, with European leveraged loans outperforming high yield
  • The strength of the European bond market is reflected by the continued decrease in yields in the HY market
  • Given the continued dovish stance of the ECB we expect the differential in HY spreads versus loan discount margins will be maintained
  • European leveraged loans are benefitting from technical tailwinds – significant repricing activity alongside robust new issuance
• Looking ahead, European market fundamentals remain problematic when compared to the US
  • An over reliance by European markets on Central Bank stimulus is an increasingly significant longer-term risk for fixed income markets
  • Investcorp expects demand reducing for new assets as spreads tighten putting pressure on CLO equity arbitrage
  • We also expect a stabilization of spreads in Q2 given that CLO AAA spreads have started to widen and the pipeline for new transactions is strong

Philip Yeates, Head of European Credit Funds at Investcorp commented, “In light of European credit market dynamics, we continue to conservatively position our portfolios to take advantage of short-term trading opportunities provided by market volatility. We expect that as new primary transactions continue to launch in the remainder of 2021, we will be provided with fresh opportunities to rotate portfolios to increase yields. 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.”

David Moffitt, Co-Head of US Credit Management at Investcorp added, “Across both the US and European markets we observe positive trends in both issuance and underlying asset performance with the expectation these trends will continue into the forthcoming quarter. Technical factors dominated Q1 and we are seeing an improvement in both ratings and lower than anticipated defaults. We are expecting a robust loan issuance calendar, and we expect continued momentum into Q2. We would expect a correspondingly strong CLO issuance calendar with high yield crossover buyers drawn to relatively attractive yields in loans and CLOs which afford some measure of rate protection given that they are 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.