Default Rates Manageable: Brookfield Oaktree 

Although many predict greater default rates for leveraged loans, Brookfield Oaktree Wealth Solutions, a subsidiary of Canada’s Brookfield Asset Management, believes these will be manageable even if economies in the U.S. and Europe contract. 

In its quarterly report, Real Estate Optimism, Infrastructure Growth, and Strength in Loans, the asset management firm stated that loan default activity remains below the historical average. 

Meanwhile, the overall performance of private credit demonstrates market resiliency, with direct lending yields hitting 11.76% in the third quarter of 2023, compared to 7.69% for high yield. 

“Despite a significant slowdown in mergers and acquisitions, private lenders continue capturing market share from traditional banks, helped by the resilient nature of the asset class,” the report said. 

Last year, U.S. senior loans posted their best annual performance in over a decade, gaining 13.32%. 

With interest rates above their 10-year average, loans remain appealing, despite concerns that the market’s overall quality has deteriorated, according to the research. 

“Even at a reference rate of 3.8%, the implied yield of leveraged loans should remain attractive, suggesting investors who stay invested will continue benefiting from high coupons for the foreseeable future,” the authors noted. 

“In addition, since collateralized loan obligations are the main holders of leveraged loans and are considered stable buyers of the asset class, there should also be limited selling pressure, making leveraged loans potentially less volatile than many other asset classes.”