Although many are forecasting higher default rates for leveraged loans, Brookfield Oaktree Wealth Solutions expects these to be manageable even if economies in both the US and Europe contract.

In its quarterly report, the asset management group said default activity in the loan market remains below the historical average.

Meanwhile, the performance of private credit overall suggests resilience in the market, with yields in direct lending reaching 11.76 per cent in the third quarter of 2023, compared with 7.69 per cent in high yield.

“Despite a significant slowdown in mergers and acquisitions, private lenders continue capturing market share from traditional banks, helped by the resilient nature of the asset class,” the report said.

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Last year, US senior loans posted their best annual performance in more than a decade, gaining 13.32 per cent.

With interest rates above their 10-year average, loans continue to remain attractive, despite concerns that the overall quality of the market has declined, the report said.

“Even at a reference rate of 3.8 per cent, the implied yield of leveraged loans should remain attractive, suggesting investors who stay invested will continue benefiting from high coupons for the foreseeable future,” the authors noted.

“In addition, since collateralized loan obligations are the main holders of leveraged loans and are considered stable buyers of the asset class, there should also be limited selling pressure, making leveraged loans potentially less volatile than many other asset classes.”

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