Market & Topical Perspectives
Alternative Credit: 2Q23 Review
Alternative Credit: 2Q23 Review
With March’s bank failures seemingly contained, markets refocused their attention on the hawkish rhetoric coming from the Federal Reserve.
Key Takeaways
While equity market conditions grew relatively placid in the second quarter, interest rates bounced sharply off post-bank failure lows as hawkish Fed rhetoric re-established itself as the dominant driver of sentiment.
The higher cost of capital is weighing on borrowers, and the default rate on broadly syndicated loans is near its long-term average. Rating agencies, meanwhile, continue to downgrade paper at a rapid clip.
Loan supply and demand were both challenged in the quarter. Pronounced volatility and higher interest rates continued to stymie new-loan issuance, while limited M&A activity has disrupted what is usually a reliable pipeline of borrowers. Collateralized loan obligation (CLO) formation ground to a halt, as high loan prices and expensive financing has made investing in these structures less compelling.
We have been de-risking the portfolio in various ways over recent quarters and expect to remain defensively positioned until greater clarity emerges.