Mid-Year Credit Outlook: Divergence to Persist through 2024

Partner, Head of Credit Product

The buoyant demand for corporate debt that propped up primary markets this year came alongside pockets of distress in the riskier parts of the market. We expect this divergence to persist through 2024. In this outlook, we’ll explore the bifurcation in the market, investment themes—from AI to elections—in opportunistic credit, the vanishing liquidity premium in investment grade debt, and the relative value of BDC’s unsecured debt.

Key Takeaways

  • The buoyant demand for corporate debt that has bolstered primary markets this year has come alongside pockets of distress in the riskier parts of the market. We expect this divergence to persist through 2024 as demand for high-quality credit keeps index spreads near record tights while a subset of lower-quality corporates struggle with generationally high interest rates.
  • We expect investment grade bonds and BB spreads will remain stable despite historically tight valuations given supportive technicals and strong credit metrics. Meanwhile, the outlook for lower-quality credit is more uncertain: Credit spreads across the B/CCC universe could be pressured if the economic backdrop deteriorates and the earnings tailwind from strong economic growth subsides. Conversely, in a higher-for-longer rate environment, some of these companies may face funding cost pressures given steep maturity walls in the US and European high yield and leveraged loan markets.
  • We believe the current higher interest rate environment coupled with a resurgence in capital markets activity will be a source of catalysts for opportunistic credit. The continued evolution of AI and its increased grid and power demand, the disruption of communications and media providers from new technologies and competitors as well as the US elections are all key themes we are monitoring.
  • Looking at the investment grade market, there appears to be a rising fragmentation in liquidity. The most liquid segments of the market have seen an improvement in trading volumes, while the liquidity profile of older vintage and smaller bond tranches has deteriorated. At the same time, liquidity premia have compressed, suggesting investors are receiving less compensation in return for holding bonds that are increasingly illiquid. With this in mind, we believe private credit is an attractive replacement for this allocation.
  • The significant growth in middle market lending over the past year has driven an increase in issuance of two types of debt instruments that share some resemblance: middle-market CLOs and BDC unsecured debt. While issued in distinct markets—structured and corporate credit respectively—they have similar underlying risk exposures making their valuations readily comparable. We present a novel analysis comparing the two types of structures in a later section.

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


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