Massive moves in the credit markets are occurring in tandem with the stock market rout. Concerns about leverage and credit quality are coming to fruition with the largest one day move in the S&P/LSTA Leveraged Loan Index since 2008

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June! The weather has finally turned for the better and stay-at-home restrictions start to loosen around the country. The stock market has certainly taken to heart the possibility that the economy will improve dramatically in the months to come. As of this writing the S&P 500 is shockingly above 3,000 points, off about only 6% from the start of the year and about 11% off from the market’s peak in mid-February. While I enjoy seeing the recovery, this a quite a noisy signal. Contrary to this recovery, pressure is mounting on BDC’s and leveraged loans. The credit market is still on uncertain grounds as many businesses are forced to operate differently, and millions are still unemployed or furloughed. The 10-Year yield is still near all-time lows (sub 1%), suggesting many investors are not yet certain on when to transition to risky assets. The disparity in the equity and credit markets is a noisy signal, resulting from massive monetary intervention and a relative perspective on the recovery of the economy. Uncertainty will be the theme for the remainder of 2020, and with that the financial markets (including the stock market) will remain volatile as we search for the right signals.

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U.S. Leveraged loan downgrades continued a feverish pace in March. The number of leveraged loan downgraded by S&P Global reached 171, which according to S&P/LSTA Leveraged Loan Index is a record. This is only the beginning of the stresses to come on the credit markets. Exceptionally low interest rates encouraged businesses of all levels of financial strength to tap the credit markets in the last growth cycle. Those weaker borrowers, who might have otherwise not borrowed, will face the stiffest test. Their resolve will echo through our global economy at a rapid pace.

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