Credit Market Dynamics

U.S. Leveraged Finance and Private Credit Round-up: Q3 2023 - The U.S. loan market in Q3 2023 showcased resilience, with Sep 2023 recording the highest gross institutional loan volume since early 2022. This surge was driven by opportunistic repayments, refinancings, repricings, extensions, and M&A activities. - However, it's worth noting that middle-market loan volume hit its lowest point since Q3 2020, while M&A-related volume is at its lowest since 2010. - Despite these trends, the loan market remains favorable for leveraged buyouts (LBOs), especially those with low leverage ratios. YTD 2023, the average pro-forma adjusted debt multiples for large corporate borrowers dropped to the lowest levels since 2012. - Private Equity sponsors are also stepping up their game, providing higher equity contributions as a percentage of debt and equity capitalization. The average equity contribution has risen to over 50%, surpassing the 41% average seen in the past ten years. - Loan default rates have remained low, dropping to 1.27% for the rolling twelve-month period, a decrease of almost 50 basis points since July 2023. However, investors anticipate a relatively quiet 4Q 2023 for M&A-driven transactions due to increased interest rates and concerns about a potential 2024 recession. - As a result, a shift towards private credit transactions is expected, which offers certainty of execution and alternative financing arrangements such as payment-in-kind (PIK) features. Private credit is poised to dominate the credit market, with Moody's estimating that private credit funds have a staggering $214 billion of dry powder in the U.S. and $450 billion globally, ready to be deployed. - PE sponsor portfolio companies are increasingly turning to private credit for general corporate purposes, with funding for this category reaching 25% by deal count in the first three quarters of 2023, compared to 16% in the same period last year. - Portfolio companies are seeking refinancing opportunities through private credit rather than traditional bank and institutional lenders to avoid defaults and bankruptcy filings. Competition between private credit and traditional leveraged finance lenders intensifies. #privatecredit #leveragedfinance #leveragedloans #debtcapitalmarkets #corporatefinance #refinancingrisk #defaultrisk #highyielddebt #highyieldloans #leveragedbuyouts

🧠 Two Credit Spread Indicators to Watch Even if you are not a direct investor in credit bonds, sometimes it pays to watch the credit spreads for signs of cracks in the market before equity markets fully react. We'd rather be early than late right? When assessing the general credit health of the market, two signals deserve close attention: the #CDX Investment Grade Spread and the ETF I-Spread (as seen in #LQD). 📌 1. CDX Investment Grade (White Line on Chart) A synthetic measure of credit risk, CDX represents the cost to buy protection on a basket of investment grade (IG) names via credit default swaps (CDS). A rising CDX = rising fear. Since it is a synthetic, liquid market, it is often the fastest-moving credit risk barometer, reacting instantly to macro shocks, liquidity crunches, or systemic risk. Think of it as the "credit VIX" — high-frequency and highly sensitive. 📌 2. ETF I-Spread (Orange Line) The I-Spread compares the yield of a bond ETF like LQD to a duration-matched Treasury. Higher I-Spreads = investors demanding more compensation for credit risk in cash bonds. This spread reflects supply/demand pressures, ETF flows, downgrade concerns, and broad credit appetite in the cash bond market. 📉 Why These Indicators Matter When both CDX and I-Spreads are rising, the market is flashing broad credit concern. But when they diverge, it tells you something deeper: ➡️ CDX > I-Spread: synthetic markets are more risk-averse than the cash market — possibly signaling hedging activity or fear before it's priced into bonds. Less noise more signal. ➡️ I-Spread > CDX: cash bonds may be under pressure due to ETF outflows or idiosyncratic stress — technical selling, not systemic risk, may be driving the move. This can still be useful as you tells you to look for OTHER reasons why the ETF I-Spread diverges. This month's chart shows that the seas are calm in credit. Notice that spreads are near the bottom of the range for the month, likely a reflection of the subsidence of turmoil related to permanent tariffs. CDX tightening modestly while LQD’s I-Spread compressed even faster, suggesting ETF demand is absorbing credit risk more aggressively than the CDS market. 🧭 Interpretation: Cash is healing faster than CDS — perhaps a sign of yield-hungry investors stepping back into IG. All this is a signal of constructive credit sentiment — for now. 💡 For Fixed Income Investors Whether you're managing duration, evaluating risk-on/risk-off signals, or assessing dislocation opportunities — tracking both synthetic and cash credit spreads offers a fuller picture of the market's true credit tone. Nothing screams #activemanagement more than investing in credit. 📊 *FICM Chart sourced from Bloomberg #CreditMarkets #FixedIncome #ETFs #BondMarket #MarketSignals #InvestmentGrade #MacroRisk #SanJacAlpha #SpreadTrading #PortfolioInsights

A defining feature of the market right now is imbalance: too much capital chasing too few quality deals. Our lender survey showed that 80% of respondents saw investor demand exceeding borrower supply—up from 70% in Q1. This creates enormous competitive pressure, and spreads have compressed as a result. Interestingly, refinancing and recapitalizations overtook new platform M&A as the leading use of proceeds. This reflects both muted exit activity and a strategic shift toward maturity extension in an uncertain environment. Add-on acquisitions are still happening, but the new platform acquisitions / buyouts are being deferred until valuations and policy clarity improve. For lenders, this environment has meant expanding hold sizes and stretching on structure to secure mandates. For sponsors, it’s meant a borrower-friendly market—even if the underlying macro feels uncertain. The paradox is striking: headlines suggest risk, but the private credit market is functioning with intensity and depth. If anything, the imbalance highlights how much capital remains sidelined, waiting for the right opportunities. When M&A volumes rebound, competition will likely shift away from refinancing transactions and rotate in favor of the new M&A opportunities that are coming to market. #privatecredit #privateequity

Collateral: The Unsung Risk Dampener in Quant Finance In Quantitative Finance, collateral fundamentally reshapes the exposure profile between trading parties. The image below breaks this down, showing how credit exposure evolves with and without collateral. 1. Day 0: Mechanics of Collateralized Exposure → In the top-left panel, the red curve shows an MTM (Mark-to-Market) increase — the current fair value of a contract rising from MTM₀ to MTM₁. → Without collateral, the full MTM gain becomes unsecured exposure. → With collateral, only the amount above the threshold is exposed — and only until the collateral (C₀) is posted. → However, due to margin call lag (the time between breach and settlement), there’s still a temporary window of uncollateralized risk. → MTA (Minimum Transfer Amount) defines the minimum MTM move needed to trigger a margin call — filtering out operational noise, but leaving small residual risks. → These frictions — lag, threshold, and MTA — mean even collateralized positions are never zero-risk. 2. Day 0 to Day 5: Exposure Evolution Over Time → The top-right panel tracks how exposure unfolds. → Without collateral, exposure grows continuously with MTM. → With collateral, the exposure takes a stair-step form — adjusting only when margin is posted. → This illustrates a key modeling truth: collateral is updated at discrete intervals, not continuously. → During high volatility, these gaps can be material. For example, in the 2008 crisis, delayed or disputed margin calls across CDS portfolios led to sudden spikes in exposure — despite existing collateral agreements. → Models that ignore these dynamics underestimate intra-day risk buildup and response failure. 3. Day 5 and Beyond: Re-Collateralization and Adjustment → By Day 5 (bottom-left), a new collateral level C₁ is posted as MTM peaks again. → This reflects dynamic realignment — but posting is never frictionless. → Delays due to liquidity issues, back-office cycles, or valuation disputes leave critical windows of unprotected exposure. → Robust risk management must simulate not just MTM shocks but operational delays and posting constraints under stress. 4. Full-Time Horizon Simulation: What Models Must Capture → The final panel (bottom-right) simulates the full exposure profile. → Without collateral (blue), exposure grows rapidly and peaks. → With collateral (pink), periodic resets contain the risk — but never fully eliminate it. → Many EE and PFE models wrongly assume perfect collateral posting. → Real exposure depends on how well your assumptions reflect frictions like call frequency, batch netting, and intraday price swings. → Ignoring these leads to deceptively clean but dangerously inaccurate risk profiles. Collateral isn’t just a legal buffer. It’s a financial engineering tool — one that turns stochastic credit exposure into a measured, conditional structure. #QuantFinance #Collateral #CounterpartyRisk #ExposureModeling #CVA #DerivativeRisk #FinancialEngineering

I shared my thoughts with Private Banker International about private credit markets, challenging the "bubble" narrative we've been hearing so much about lately. The reality? Private credit has evolved into a sophisticated, data-driven cornerstone of modern finance - far from its early days of email chains and endless spreadsheets. The numbers speak volumes: this market is projected to hit $2.8T by 2028, and in 2022 alone, it helped create 1.6M jobs and generated $224B in GDP. I believe private credit has matured to fill crucial market gaps, especially for SMBs seeking flexible capital solutions. Rather than being an unchecked market, today's private credit landscape is more mature than ever with better risk assessment capabilities, transparency, and governance Would love to hear others' perspectives as its evolved from an alternative investment to a cornerstone asset class. #PrivateCredit #FinancialMarkets #Investment #Banking

ZRG Partners’ Q2 2025 Quarterly Market Report on the Distressed Space, slated for release in late June or early July, offers a deep dive into the evolving dynamics of private credit and turnaround & restructuring.   Key market insights: <> U.S. economy signals recovery with 2.2% projected GDP growth, following a 0.3% Q1 contraction, though tariff uncertainties linger. <> Private credit AUM exceeds $3 trillion globally, driven by demand for high-yield, floating-rate investments. Spread compression signals a borrower-friendly market, with focus on upper middle-market firms ($50–$150M EBITDA). <> Bankruptcy filings up 13.1% year-over-year, with healthcare, retail, and casual dining facing acute distress, spurring distressed M&A and liability management strategies like up-tier exchanges. <> Inflation at 2.3% and federal funds rate steady at 4.25%–4.5%, with potential rate cuts on the horizon, shaping financing and restructuring strategies.   How are these trends influencing your approach to capital deployment or portfolio management? Share your thoughts below or DM me to discuss. Reserve your copy of the report to stay ahead in this complex landscape.   #PrivateCredit #Restructuring #DistressedM&A #MarketInsights

Private Credit Reshapes Law Firm Restructuring As private credit continues to capture market share from broadly syndicated loans, law firms not already immersed in direct lending are evolving their practices to stay competitive. 🔸 Key Trends: Private Credit Dominance: Private credit now drives more restructuring work than bank loans at many Big Law bankruptcy practices. This shift is prompting firms to hire restructuring and finance partners with connections to direct lenders. Market Shift: While broadly syndicated loans are making a comeback, much of the market has permanently shifted to direct lending. Historically, law firms without strong ties to banks were at a disadvantage in restructuring deals. Today, the rise of private credit—loans from non-bank lenders like private equity firms and alternative asset managers—has leveled the playing field. Growth of Private Credit: Emerging from the Great Recession, private credit has become a $1.7 trillion industry, fueled by $2.6 trillion in private equity dry powder. This sector now accounts for more billable hours than broadly syndicated loans at many Big Law firms. 🔸 Strategic Shifts: Lateral Movement: The growing emphasis on private credit has led to significant lateral hiring, such as Paul Hastings’ acquisition of an 11-partner private credit group from King & Spalding. Multidisciplinary Teams: Success in private credit restructuring requires a multidisciplinary approach, involving expertise in finance, M&A, labor and employment, restructuring, and tax. Out-of-Court Restructuring: Private credit deals, with their smaller syndicates and simpler capital structures, are more likely to be restructured out of court. 🔸 Challenges and Opportunities: Liability Management: The rise of contentious liability management transactions in the broadly syndicated loan market contrasts with the relationship-based world of direct lending. Client Relationships: Firms must focus on serving asset managers throughout the life cycle of a private credit deal, rather than assigning perpetual credit to the originating partner. 🔸 Future Outlook: Market Positioning: Firms that have emphasized private credit over the past decade are well-positioned to capitalize on its growth. However, it’s not too late for firms focused on broadly syndicated loans to adapt. Restructuring Growth: The private credit default rate rose to 2.71% in Q2 2024, indicating more restructuring opportunities ahead. As private credit continues its spectacular growth, now is the perfect time to explore lateral opportunities in this dynamic space. For a confidential discussion about opportunities in private credit restructuring, please contact me via DM, or at ballyaujla@puresearch.com. #PrivateCredit #Restructuring #LawFirms #LegalTrends #LateralHiring #AmLaw100 Source: https://lnkd.in/exH9yDVh

Private Credit’s Moment Is Accelerating—Here’s Why Amid market turmoil, private credit is stepping into the spotlight. My take on what’s driving this shift (sources in first comment): 1. Credit Supply Pivot: Banks are going risk-off, and private credit is filling the gap—just as it’s already booming. Bloomberg flagged this trend today. 2. Surging Demand: Volatility (think VIX spikes) and uncertainty around medium-term credit are pushing companies to act now. 3. Rate Cut Tailwinds: A shrinking 10y/2y Treasury spread signals lower rates ahead. “Debt-curious” firms will refi faster; others will jump in as borrowing costs drop. The Unknowns? A recession could spike defaults and stall credit. Or if global investors dump U.S. Treasuries, can the Fed’s QE keep rates in check? Near-Term Thesis: More companies will seek corporate debt, and private credit investors will meet more of that demand—faster than the already-hot pace we’ve seen. At Arc, we’re living this shift: applications are up, time-to-term-sheet is down, and private credit is winning more bids. What’s your read?