Floating rate features and “senior” status: further opportunity ahead for private credit assets

Private Credit: An alternative asset class to boost yields

Private credit outlook: opportunity set continues to look attractive

In 2022, public fixed income markets experienced one of the worst years in memory. Aggressive rate hiking from central banks led to a dramatic selloff, hitting long duration assets particularly hard.

Private credit assets, on the other hand, fared far better. This was partly due to their floating rate feature, which means that coupon payments adjust to reflect changes in the interest rate environment. This helped offset price declines.

Going forward, we believe the opportunity set continues to look attractive. In this piece, experts from our bank loans, direct lending and distressed credit teams share their views. In particular, they focus on:

  • The market environment today
  • What to look out for in the coming months

As ever, our Sales teams are on hand to discuss these topics in further detail, answering any questions you may have. Please do not hesitate to get in touch.

  • Kevin%20Egan

    Bank loans: income opportunity isn’t going away

    Kevin Egan

    Co-Head of Credit Research

As introduced by Kate, the floating rate nature of bank loans was a real strength in 2022. But a common question from investors is, what happens when the economy starts to cool and rates stabilise?

We would start by saying that, right now, the forward curve suggests we are still in for one or two more rate hikes from the US Federal Reserve (Fed). Europe, meanwhile, is expecting even more rate hikes.

Once the Fed does pause rates, they are expected to stay at that level for quite some time and, when they ultimately fall, they are not expected to fall precipitously. In other words, we believe investors will continue to enjoy a high level of income.

Case study: what does history suggest?

To help illustrate the opportunity, let’s look at a historical case study.

There have been four periods since the Global Financial Crisis when loan yields exceeded 8% (they are currently around 10%).

If you look at the ensuing 6-12 months, you will see that the loan market has delivered very strong outperformance over these periods, with a 10.69% average 12-month forward return.1

We believe this may present a compelling opportunity for long-term investors in bank loans and Collateralised Loan Obligations (CLOs) alike.

“Senior secured” status: attractive in times of turmoil

In addition to their floating rate feature, the “senior secured” status of loans can help mitigate downside risk.

Historically, this has translated into relatively high recovery rates (60-70%) compared to other subordinated asset classes, for example high yield bonds (30-40%).2

This may prove particularly attractive for investors if we enter a recessionary environment. 

  • Ron%20Kantowitz

    Direct lending: opportunity in the wake of the banking crisis

    Ron Kantowitz

    Head of Private Debt

Challenges in the banking sector in March now feel a long time ago, and many are viewing them as idiosyncratic in nature rather than systemic. What is important to note is that these events had minimal impact on direct lending as an asset class, as direct lenders are not reliant on banks to implement their investment strategies.

In fact, should banks continue to tighten their lending standards ahead of an expected economic slowdown or recession, direct lenders could stand to benefit as more businesses look to them as a source of capital. This could create a larger opportunity set with attractive yields, lower leverage and more lender-friendly documentation.

Outlook: markets are now offering better visibility

Having reflected on the events in the first half of the year, let’s now look forward to what we can expect in the months to come.

Our belief is that macro conditions will likely get worse in the short to medium term. However, markets like this excite us, and we believe the current opportunity set may result in one of the best vintages on record.

Markets now have good visibility on the headwinds that are likely to dominate the next 12-18 months and, as such, we believe our screening, diligence, structuring and asset allocation processes are now that much more informed.

Furthermore, from a yield/return perspective, direct lending remains quite attractive. As a floating rate asset class, Secured Overnight Financing Rate (SOFR)3 is now over 400 basis points higher than it was at the start of 2022.

Along with moderately wider credit spreads and original issue discounts, we are finding opportunities that are currently yielding in the 12% context. 

  • Paul%20Triggiani

    Distressed credit and special situations: a growing opportunity set

    Paul Triggiani

    Head of Distressed Debt and Special Situations

Small companies often run into problems, regardless of economic conditions. This is one of the main reasons that we focus on them in our distressed credit and special situations portfolios. It creates an evergreen opportunity set and allows us exposure to companies across a diverse range of industry sectors.

Additionally, today’s tough economic backdrop is creating an even larger investment universe. Companies are now having to pay a higher level of interest on their debt, and many have begun experiencing a fall in demand for goods and services.

Where this cycle differs to previous ones, though, is that it doesn’t have an industry tinge. The slowdown in the economy that we are going to see will likely impact businesses in all sectors. In other words, it will be more of a “traditional” recession. This should create the opportunity for us to skew our portfolios towards high-quality companies in good industries – companies that are simply overleveraged.

Sizing the opportunity: how big is our investment universe?

We are already seeing the effects of today’s challenging market environment in our investment pipeline, and we expect a far larger opportunity set than we saw in 2008 and 2009.

Indeed, over the last 15 years or so, non-investment grade credit markets have increased meaningfully in size to approximately $5 trillion. That’s two to three times larger than they were going into the Global Financial Crisis.

If you segment the overall market by deal size, you will see that the small cap distressed space is really quite large as it stands today, regardless of how you define it (Figures 1 and 2). 

Figure 1: Growth of the Global Leveraged Loan, High Yield and Direct Lending Markets

Sources: Credit Suisse and KRB DLD research, as of December 31, 2022

Figure 2: Small Cap Distressed Leveraged Loan and High Yield Bond Universe by Deal Size (in $B)

Sources: Credit Suisse and KRB DLD research, as of December 31, 2022

As a result, even if we assume modest default rates of 5% over the next 12-18 months (approximately half of what occurred during the Global Financial Crisis), we expect a materially larger opportunity set than we saw in 2008 and 2009.

This is an exciting prospect for distressed credit investors.

Discover our capabilities

Invesco is one of the world’s largest and most experienced private credit managers, catering to a wide range of client objectives and risk tolerances.

We follow a consistent credit process centred on due diligence, conservative underwriting, and risk mitigation. The idea is to preserve capital while targeting attractive risk-adjusted returns.

Contact us to learn more about our capabilities in:

  • Broadly syndicated loans
  • Direct lending
  • Distressed credit and special situations


Private credit is an asset class that can generally be defined as non-bank lending. In other words, it includes privately negotiated loans and debt financing. The private credit market typically serves borrowers that are too small to access public debt markets, or that have unique circumstances requiring a private lender.

Broadly syndicated loans are privately arranged debt instruments comprised of below investment grade borrowers. They are made to large cap companies and syndicated by intermediary commercial and investment banks. These loans are then distributed to multiple institutional investors.

CLOs, or collaterialised loan obligations, are securitised versions of broadly syndicated loans. CLOs create portfolios of hundreds of loans and structure them into different tranches with different risk/return profiles. This allows investors to choose their preferred balance of risk and return, which benefit from a collateralised structure.

Typically, CLO notes offer a premium to other securitised vehicles because of the complexity of understanding the underlying private loans and the uniqueness of each CLO structure. CLO notes are registered securities and trade and settle like bonds.

Direct lending means providing capital to companies or businesses without the benefit of an intermediary. In other words, you’re directly lending to a company.

Distressed credit involves investing in the senior debt of companies at significant discounts to par, usually due to perceived fundamental weakness.

Returns are generated by investing in companies where, over the longer-term and through various actions, meaningful upside potential can be unlocked.


  • Source: JP Morgan Leveraged Loan Index data. Based on in-depth analysis conducted in January 2023. Past performance is not a guide to future returns.

    Source: J P Morgan as of May 2023.

    The Secured Overnight Financing Rate is a benchmark interest rate for dollar-denominated derivatives and loans. 

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    Alternative investment products may involve a high degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.

Important information

  • All data is provided as at the dates shown, sourced from Invesco unless otherwise stated.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.