Corporate Credit Highlights

• Barclays Strategy on investment-grade coupons: “The average coupon for investment-grade (IG) bonds has steadily grown over the past several years amid the higher-rate environment, now reaching 4.36%. In 2024, the average coupon rose by 21 basis points, and it is up over 70 basis points since the recent trough in 2022. We think that most of the coupons, one way or another, get reinvested back into the IG market. We estimate the average coupon of the Barclays Capital U.S. Investment Grade Bond Index will rise by another 25 basis points in 2025. We anticipate $400 billion in coupons to be paid out next year, marking a $40 billion, or 11%, increase year over year. Given our expectation for $610 billion of supply net of maturities in 2025, this would mean 66% of the incremental IG issuance would be absorbed by coupon income alone, up from 62% in 2024. This is also the third-highest percentage since 2007, only surpassed in 2018 (82%) and 2019 (66%). … The additional source of demand from elevated coupon income has historically created a positive technical for secondary spreads. We look at years when coupon as a percent of net supply has been at least 60% and find that spread volatility is well below average. In fact, spread volatility in those years with coupons equating to at least 60% of net issuance is typically 5 basis points lower than the average year.” ¹‍
• JP Morgan trade desk on historical political regimes and IG spreads: “Since 1989, IG spreads have been tightest on average under a Republican president with full control of House and Senate at 103 basis points whereas they've been the widest under a Republican president with a split Congress at 150 basis points. But the three years where spreads were at their tightest over this period were all with a Democratic president and Republican legislatures in the late 90s.” ²

• BOA Strategy on loan supply post-election: “Year to date, loan primary activity has been dominated by refinancings and repricings. We think that Trump's policies would likely be a tailwind on both leveraged loan and CLO issuance. The Federal Trade Commission (FTC) would likely see a change in leadership that could open the path to increased M&A and leveraged buyout activity. We think that the proposals in Basel III endgame would likely be revised. This could imply increased capacity to lend across banks, which should also help leveraged-loan issuance and allow better competition versus private credit.” ³
  
• LCD note on leveraged-loan fund assets under management (AUM): “Leveraged loan assets under management grew slightly in October, and the flow of assets to loan mutual funds and ETFs has increased in November amid broadly bullish sentiment. Assets at loan funds collectively increased by $352 million in October, according to Morningstar, putting a stop to consecutive months of declines, including a heavy contraction in August as the Fed primed to cut rates for the first time since the Covid-induced slashing in March 2020.” ⁴
  
• Citi Strategy on 2025 CLO outlook: “We expect the total U.S. CLO new issuance to reach $210 billion in 2025, which includes $170 billion broadly syndicated loans (BSL) CLOs and $40 billion private credit CLOs. Meanwhile, the net CLO supply will likely increase to $110billion. The CLO refi/reset wave will continue, and we forecast $180 billion CLO reset and $50 billion refi volume in 2025. We think top-tier CLO AAA spreads will tighten slightly further to SOFR plus 125 basis points by the first quarter of 2025 as investors chase high-quality, scalable floating-rate exposure.” ⁵

• BAML Strategy 2025 high-yield (HY) forecasts: “Our base-case scenario calls for fair value HY spreads at 300 basis points in the next 12 months on top of the10-year U.S. Treasury at 4.25% and 5-year U.S. Treasury at 4.00% assumptions. We are projecting HY default rates at 1.7% par-weighted (which includes both payment defaults and liability management exercises or LMEs). This, combined with a 42 point [or cents on the dollar] recovery assumption, should produce 60basis points of credit loss, given that likely defaulters are already trading at 65 points [or cents on the dollar]. We are also assuming a 4.7% net upgrade rate, which translates into about 10 basis points of capital appreciation for the ICE BofAML U.S. High Yield Index. All these inputs taken together, along with the observed yield-to-worst of 7.18%, result in the projected total return of 6.4% in the next 12 months.”  ⁶
  
• Citi Strategy 2025 HY supply forecast: “We forecast $370 billion of bond supply in2025, third only to 2021’s $458 billion and 2020’s $432 billion. As we highlighted in the past, the maturity runway in high yield remains very short, which will keep issuers active in primary. Increased M&A and leveraged-buyout activity should also boost issuance.” ⁷
  
• Barclays2025 HY default rate forecast: “For high-yield bonds, we forecast an issuer-weighted default rate of 2.0 to 3.0% for next year. Factors driving this forecast include: Lending standards continue to ease, and distressed rates have declined sharply. Our top-down model produces a default rate of 2.5%. A complementary bottom-up approach in collaboration with Barclays' fundamental analysts generates a default rate of 2.3%. The maturity wall is still elevated in high yield, and issuers will need to refinance at higher rates. However, most of the maturity wall is composed of high-quality paper. Our maturity wall-focused default analysis produces a default rate of 2.9%. We use each of these approaches to land on our forecast of 2.0 to 3.0% issuer-weighted/1.0 to 2.0% par weighted default rate for U.S. HY.” ⁸

Definitions
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• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• Beta is a statistical measure of the volatility of a stock versus the overall market.
• A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• ‍A collateralized loan obligation (CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.
• Credit rating or quality is when bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard & Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from “AAA,” which is the highest grade, to “D,” which is the lowest grade.
• The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. senior-secure credit (leveraged-loan) market.
• A debt market trades loans that pay interest.
• A distressed exchange is proposed by a company to avoid a bankruptcy, improve liquidity, reduce debt, manage its maturity dates.
• The distress ratio is the percentage of corporate speculative-grade securities with market yields that are considered distressed.
• Duration measures how long it takes, in years, for an investor to be repaid a bond’s price through its total cash flows. Duration can also be used to measure how sensitive the price of a bond or fixed-income portfolio is to changes in interest rates.
• The effective yield is a financial metric that measures the interest rate (or coupon rate) return on a bond
• A fallen angel refers to investment grade bond that is given a reduced rating to “junk bond” due to adecline in the credit rating of the issuer.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• ‍Investment grade refers to the quality of a company's credit. To be considered an investment-grade issue, the company must be rated at "BBB" or higher by Standard and Poor's or Moody’s.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.
• Leverage refers to using debt (borrowed funds) to amplify returns from an investment.
• A leveraged buyout (LBO) is a type of acquisition whereby the vast majority of the cost of buying a company is financed by borrowed funds.
• A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies.
• A middle market firm is a company with annual revenues that fall in the middle of the range for its industry.
• Private markets entail investments in assets not readily accessible or traded. Private market investments encompass a wide canvas, including private equity, venture capital, real estate, to other alternative investments.
• New issue concession is a negative difference in yield between a new bond and a comparable seasoned bond already trading in the secondary market. It is the investment yield given up by investors, and cost of borrowing saved by issuers.
• A rising star refers to a bond that is rated as a "junk bond" but could become investment grade because of improvements in the issuing company's credit quality.
• A secondary market isa market where investors purchase securities or assets from other investors, ratherthan from issuing companies themselves.
• A share buyback is a company's purchase of its outstanding stock shares. Buybacks reduce the number of shares available on the open market.
• ‍Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• Syndication is the process by which banks and investors join to make a loan to a company.
• A tight spread means that the difference between the asking price and the bid price is low.
• Trailing three months is a backward-looking indicator that refers to the most recent three-month period.
• U.S. Treasuries represent the Bloomberg US Treasury Index, which is made up of U.S. government bonds of various durations.
• Volatility is the range of price change a security experiences over a given period of time.