Corporate credit outlook

Q2 2024 Corporate credit outlook: Drafting down the straightaway

Continued economic stability has fostered healthy fundamentals in most leveraged credit, but risks are accumulating in loans to lower-rated private borrowers.

Download the outlook
April 19, 2024 | 20 minute read

Fundamentals and technicals combine

After an exceptionally strong 2023—the second-best year ever for loans and eighth best for high yield—gains have continued at a moderated pace in Q1. Investors’ risk appetite has been broad-based, reflected in the strong performance of equities and lower-rated credit. Treasury rates rose and spreads tightened in the first quarter, elevating valuations based on spreads even higher relative to history. However, yields remain historically attractive in leveraged credit and fundamentals, especially in high yield, which mostly remain firm.

Last quarter, we discussed our return expectations for 2024 with our outlook for high yield and loans to provide returns at or near current yields, and income playing a dominant role. With credit yields now sitting around 7.75% for high yield and 9.82% for loans, we continue to expect income to drive total returns, but see additional upside in high yield. Conversely, in loans, total returns may fall short of current yields as declining quality and persistently higher rates have increased expected credit losses. Default rates have increased in loans and recovery rates—although modestly improved—remain deeply depressed relative to the long-term average. We continue to note the risk of higher defaults and distressed exchanges in smaller private loan-only issuers, a small part of the market with generally riskier profiles.

Credit fundamentals and technicals remain largely supportive, as companies remained conservative in managing their balance sheets through the end of 2023. Gross issuance in loans has been particularly strong to start the year; however, 88% of volume has gone toward repricing and refinancing as credit conditions have supported borrowers seeking to address near-term maturities and reduce interest costs. We expect the volume of loan repricing to remain high in the coming quarter, which has historically been associated with lower returns in subsequent periods.

Key takeaways

  • Income-driven return outlook remains favorable.
  • Maintain up-in-quality bias.
  • Prefer bonds versus loans due to quality and price convexity

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Alan Flannigan

Alan Flannigan, CIPM, CAIA

Associate, Investment Research

Christopher Bole

Financial Writer, Fund Communications

Robert Hoffman, CFA

Managing Director, Credit Wealth Solutions

Search our site