U.S. Leveraged Credit 2024 Outlook

U.S. Leveraged Credit 2024 Outlook

Time to read: Minutes

Despite economic uncertainty and rising defaults, we believe leveraged credit in the U.S. continues to offer attractive return potential, supported by compelling yields, a favorable technical backdrop and steady demand.

Executive summary

Resilient performance in 2023

Despite initial concerns of a U.S. recession, global financial markets showed resilience in 2023. A backdrop of fiscal support, steady corporate earnings and positive investor sentiment led to strong performance in risk assets, including leveraged credit. High carry and healthy market technicals outweighed fundamental concerns, resulting in double-digit returns for senior loans and high yield bonds.

Favorable supply and demand dynamics

We expect the leveraged credit market to continue benefiting from a favorable technical backdrop in 2024. Net issuance remains low, while demand continues at a steady clip. Refinancing activity will likely be the primary driver of supply, with a potential uptick in mergers and acquisitions (M&A) activity. However, the market may face challenges as collateralized loan obligations (CLOs) exit their reinvestment period and refinancing needs increase.

Fundamentals and defaults

With policy rates likely at peak levels and a decelerating corporate earnings environment, fundamentals in leveraged credit faced growing pressure in 2023. Leverage and interest coverage metrics exhibited negative trends, and defaults and downgrades increased. While defaults are expected to tick higher, the majority of borrowers should continue to meet their debt obligations. Downgrade activity is likely to decelerate, but certain sectors, such as healthcare and telecom, may face continued challenges.

Sector views

We anticipate late-cycle dynamics will continue to drive a wide dispersion of outcomes and an uptick in defaults. The resulting relative-value opportunities will provide an environment ripe for credit pickers. For example, although we expect challenging dynamics to continue for sectors such as healthcare, software, telecom, media and communications, we also see opportunities associated with TV broadcasters, surgical centers, energy and insurance brokers.

Return expectations

Despite the potential for increased defaults and challenges in certain sectors, leveraged credit in the U.S. remains attractive in 2024. Compelling yields, a supportive technical backdrop, and steady demand should continue to provide attractive returns. Active credit selection will be crucial in navigating the market, and while risks exist, the overall outlook for leveraged credit remains positive.



A note about risk

Principal risks for senior loans: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Voya’s senior loan strategies invest primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit a strategy’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the portfolio could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the portfolio’s investments, causing the portfolio’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the portfolio on a daily basis. The actual price the portfolio receives upon the sale of a loan could differ significantly from the value assigned to it in the portfolio. The portfolio may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the portfolio, the portfolio may realize proceeds from the repayment that are less than the valuation assigned to the loan by the portfolio. In the case of extensions of payment periods by borrowers on loans in the portfolio, the valuation of the loans may be reduced. The portfolio may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company.

Principal risks for high yield bonds: All investing involves risks of fluctuating prices and the uncertainties of rates and return and yield inherent in investing. High-yield securities, or “junk bonds,” are rated lower than investment grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. As interest rates rise, bond prices may fall, reducing the value of the portfolio’s share price. Debt securities with longer durations tend to be more sensitive to interest rate changes than debt securities with shorter durations. Other risks of the portfolio include, but are not limited to, credit risk, other investment companies’ risks, price volatility risk, the inability to sell securities and securities lending risks.


Index definitions

An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment. The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 of the largest companies in the United States. The Nasdaq Composite Index measures all domestic and international common stocks listed on the Nasdaq Stock Market. The Bloomberg U.S. Treasury Index is an unmanaged index that includes public obligations of the U.S. Treasury. Treasury bills and certain special issues, such as state and local government series (SLGS) bonds, as well as U.S. Treasury TIPS and STRIPS, are excluded. The Bloomberg U.S. Corporate Index measures the performance of investment grade, USD-denominated, fixed-rate, taxable corporate bond market securities. The Morningstar LSTA Leveraged Loan Index is an unmanaged total return index that captures accrued interest, repayments and market value changes. The Bloomberg U.S. High Yield Index covers the universe of fixed-rate, non–investment grade debt. Eurobonds and debt issues from countries designated as emerging markets are excluded, but Canadian and global bonds of issuers in non-EMG countries are included. The Bloomberg Corporate High Yield Index is an unmanaged index that measures the performance of fixed income securities generally representative of corporate bonds rated below investment grade. Bloomberg® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indexes. Bloomberg does not approve or endorse this material, nor guarantee the accuracy or completeness of any information herein, nor make any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, shall not have any liability or responsibility for injury or damages arising in connection therewith.

Past performance is no guarantee of future results. This document has been prepared by Voya IM for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Opinions expressed herein reflect our judgment and are subject to change. Certain information may be received from sources we consider reliable, but we do not represent that such information is accurate or complete. Certain statements contained herein may constitute projections, forecasts or other forward-looking statements based on our current views and assumptions and may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this document regarding holdings are subject to change without notice. Information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.

The distribution in the United Kingdom of this presentation and any other marketing materials relating to portfolio management services of the investment vehicle is being addressed to, or directed at, only the following persons: (i) persons having professional experience in matters relating to investments, who are “Investment Professionals” as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Financial Promotion Order”); (ii) persons falling within any of the categories of persons described in Article 49 (“High net worth companies, unincorporated associations etc.”) of the Financial Promotion Order; and (iii) any other person to whom it may otherwise lawfully be distributed in accordance with the Financial Promotion Order. The investment opportunities described in this presentation are available only to such persons; persons of any other description in the United Kingdom should not act or rely on the information in this piece. The Capital Markets Authority and all other regulatory bodies in Kuwait assume no responsibility whatsoever for the contents of this presentation and do not approve the contents thereof or verify their validity and accuracy. The Capital Markets Authority and all other regulatory bodies in Kuwait assume no responsibility whatsoever for any damages that may result from relying on the contents of this presentation either wholly or partially. It is recommended to seek the advice of an Investment Advisor.

Voya IM does not carry on a business in a regulated activity in Hong Kong and is not licensed by the Securities and Futures Commission. This insight is issued for informational purposes only. It is not to be construed as an offer or solicitation for the purchase or sale of any financial instruments. It has not been reviewed by the Securities and Futures Commission.

Voya IM accepts no liability whatsoever for any direct, indirect or consequential loss arising from or in connection with any use of or reliance upon this insight, which does not have any regard to the particular needs of any person. Voya IM takes no responsibility whatsoever for any use, reliance upon or reference by per­sons other than the intended recipient of this insight. Any prices referred to herein are indicative only and dependent upon market conditions. Unless otherwise specified, investments are not bank deposits or other obligations of a bank, nor is the repayment of principal insured or guaranteed. All investments are subject to risks, including the possibility that the value of any investment and income derived therefrom (if any) can increase, decrease or in some cases be entirely lost, and investors may not get back the amount originally invested. The contents of this insight have not been reviewed by any regulatory authority in the countries in which it is distributed. The opinions and views herein do not take into account your individual circumstances, objectives or needs, and are not intended to be recommendations to you of particular financial instruments or strategies. This insight does not identify all the direct or indirect risks or other considerations which might be material to you when entering any financial transaction. You are advised to exercise caution in relation to any information in this document. If you are in doubt about any of the contents of this insight, you should seek independent professional advice.

Please be advised that Voya IM is a non-Canadian company and is not registered as a dealer or adviser under Canadian securities legislation. The company operates in the Provinces of Nova Scotia, Ontario and Manitoba based on the international adviser registration exemption provided in National Instrument 31-103. As such, investors will have more limited rights and recourse than if the investment manager were registered under applicable Canadian securities laws.

For use by qualified institutional investors and financial professionals only. Not for inspection by, distribution to or quotation to the general public.