Insight

2023 US Senior Loan Market Outlook

2023 US Senior Loan Market Outlook

2022 review and 2023 outlook 

The year of 2022 began with promise. The pandemic was entering a less deadly phase, corporate earnings were roaring back, and financial markets were setting all-time highs. In an instant, the world changed when war erupted in Europe. Ensuing events in Ukraine have caused untold tragedy, disrupted the flow of energy and critical goods, and destabilized the global geopolitical order. Meanwhile, soaring inflation forced central banks the world over to dramatically tighten financial conditions in hopes of re-establishing price stability. The era of ultra-low interest rates – an enduring tailwind for risk assets since the global financial crisis (GFC) – ended emphatically. The reliable policy backstops of yesteryear were no more. Unexpectedly, 2022 devolved into one of the more challenging years for markets in recent memory. 

Amid the financial market carnage, loans delivered relatively muted volatility and outperformed all other relevant asset classes. Due to their floating rate coupons, loan returns directly benefitted from the staggering increase in rates. Prices declined, but less severely than other asset classes with longer duration and lower capital structure seniority. Loan default rates remained under 1%, reflecting limited immediate credit stress in the market.  

Inflation and the US Federal Reserve’s (Fed) crusade against it continue to undermine growth prospects heading into 2023. The year sets up for diminishing policy risk but mounting risk to growth and earnings. Despite the macroeconomic headwinds, loans are positioned to deliver potentially favorable returns built on coupon rates at 15-year highs and price improvement from levels which, in aggregate, appear to sit below fair value. Just as investors discount credit deterioration ahead of confirmed growth / earnings weakness, the same is true when prospects begin to improve, and we expect that inflection will occur in 2023. 

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