Coupon income is higher across the board, attractive indeed, but the weight of paying that interest expense is likely to impact borrowers, particularly those that are completing a business plan (transitional lending) in corporate credit or real estate credit. With much higher interest cost, less profitable companies and projects should be where idiosyncratic risk manifests.

Are we seeing the end of the “zombies”? Not yet, but certainly the effects of higher interest expense and an increase in idiosyncratic risk will increase the importance of quality, discernment, structure and alpha. A focus on stronger fundamentals, critical assets is critical, more so now, than over the last decade.

Over the last six or nine months, markets feel characterized by FOMO. The pursuit of risk assets has felt frenzied, and we have seen material reduction in compensation for risk across syndicated credit markets that has bled into markets we would have considered inefficient only a year ago. Is it possible that even some “private debt markets” are becoming more crowded and behaving more like traditional markets, with some expansion in risk characteristics?

You can now read the full ‘Sponsored Commentary’ at the link below