Higher Credit Quality in Broadly Syndicated Loans vs Traditional Private Credit a Key Differentiator
Traditional private credit loans (loans to smaller sized companies) have substantially higher exposure to low rated, CCC (highly speculative) loans than pools of more liquid, broadly syndicated loans (BSLs). This may have tremendous implications for the potential defaults and losses for fixed-income investors. BSL pools may experience lower defaults and thus perform better over time. This may be because BSLs typically finance larger, more established companies vs. traditional private credit loans to smaller “middle market” companies. As illustrated in the chart, recent history suggests periods of economic weakness further increase the difference (or spread) of troubled loan exposure between BSL and traditional private credit, as shown during the market turmoil of 2020. As economic uncertainty weighs on the markets, BSLs appear to be better positioned than traditional private credit or “middle market” loans.
Source: original chart courtesy of BofA Global Research, CLO Weekly, Private Credit Update: Headwinds and Tailwinds
Note: respective CCC rated exposure is from collateralized loan obligations