Corporate Credit Highlights

• Deutsche Bank Strategy on investment grade supply:  “IG issuance remained hot through November. After logging both the largest October and September on record this year, IG issuance also reached a new November high with $133bn. In fact, it is the busiest Sept-Nov period for IG by nearly $86bn, besting the post-Covid splurge in 2021. Large AI-hyperscaler deals and M&A flow punctuate what continues to be a very favorable funding environment for higher-rated firms as IG yields have been near 12-month lows since the end of August…Overall, IG gross supply is now tracking 7% ahead of last year’s run-rate, while the recent surge in issuance means that net supply has nearly caught up to last-year’s pace.” ¹‍
• Goldman Sachs Research on Hyperscaler capital expenditures (capex):  “Since 2021, the hyperscalers have collectively increased the net debt on their balance sheets by $295 billion, but their collective net debt/EBITDA leverage remains just +0.2x.  Excluding ORCL, the large public hyperscalers could theoretically increase their debt by $700 billion by lifting their net debt/EBITDA ratios to 1x, keeping their leverage ratios below that of the median A+ rated firm. However, that magnitude of issuance would equate to 38% of the total volume of gross USD IG issuance during the past 12 months.  Supply bottlenecks or investor appetite are more likely to act as constraints on near-term capex than cash flows or balance sheet capacity.” ²‍

• Barclays Strategy on recovery rates:  “In evaluating recovery trends through 1H25, we find that BSL recoveries have inflected upward to around 71%, their highest since 2022, and senior secured bond recoveries have been healthy at around 65%. Senior unsecured bond recoveries fell to 54% in 1H25, down from 72% in 2024, although these recoveries tend to exhibit slightly more volatility than senior secured instruments.” ³‍
• Barclays Strategy on 2026 default rate:  “For leveraged loans, we forecast an issuer-weighted default rate (inclusive of distressed exchanges) of 3.5-4.5% for next year. This is a meaningful decline from the current last twelve-months (LTM) default rate of 5.9%. Still, our forecast is above the longer-term median of 2.6%.” ⁴

• Goldman Sachs Strategy on high yield (HY) quality improvement: “This year the weighted-average rating factor (WARF) for the USD HY market has rapidly improved at a nearly unprecedented pace, translating to roughly a half‑notch upgrade in index quality, from close to B at the beginning of the year to closer to B+ today.  Unlike 2020, when a wave of fallen angels from IG lifted index quality, fallen angels account for less than 10% of this year’s WARF change on our estimates.  The improvement is coming from the lower tail: the share of the index rated CCC- and below has fallen from 4.8% in February to 2.7% today.” ⁵
• ^‍Barclays Strategy on 2026 default rate:  “For high yield bonds, we forecast an issuer-weighted default rate (inclusive of distressed exchanges) of 2.0-3.0% for next year. As of September, the LTM default rate for US high yield bonds was 3.7%, slightly above the median of 3.5% since 1996.” ⁶

Definitions
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• Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.
• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• A bond isa fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• Broadly syndicated loans (BSL) are a type of loan that will typically be arranged by an investment bank and then syndicated to a large group of commercial banks and specialist loan investors.
• Capital expenditure is the money spent on acquiring or maintaining fixed assets, such as land, buildings, and equipment.
• A corporate bond isa debt security that is issued by a company to raise capital.
• A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.
• The credit market refers to the marketplace through which companies and governments issue debt to investors in exchange for regular interest payments. ‍
• Credit rating is when bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard &Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from `AAA', which is the highest grade, to `D', which is the lowest grade.
• Credit spread is the difference in yield between two debt securities with the same maturity but different credit quality.
• Derivative is a type of financial contract whose value is dependent on an underlying asset, a group of assets, or a benchmark. It's an agreement set between two or more parties that can be traded on an exchange or over the counter.
• ‍Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.
• Distressed Exchange is a negotiation process between a financially troubled company and its creditors where the company seeks to restructure its debt without filing for bankruptcy.
• EBITDA (earnings before interest, taxes, depreciation, and amortization) is a standard of measurement banks use to judge a business’ performance.
• A Fallen Angel is a bond that was initially given an investment-grade rating but has since been reduced to a junk bond status.
• ‍High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The ICE BofA US Corporate Index isa benchmark index that tracks the performance of investment grade corporate debt in the United States.
• Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody’s.
• Investment Grade (IG) Index refers to the ICE BofA US Corporate Index.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• Implied default rate is a measure of the market's perception of the likelihood that a borrower will default on their debt obligations.
• ‍Leverage refers to using debt (borrowed funds) to amplify returns from an investment. A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• ‍Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity (or maturity wall) is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Mergers and Acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorption, a merger, a tender offer or a hostile takeover.
• Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market.
• Mortgage-backed securities (MBS) are investment products backed by a pool of mortgage loans.
• Net debt / EBITDA ratio is a type of leverage ratio used to determine if a borrower generates sufficient operating cash flows to meet its mandatory interest obligations and pay down its outstanding debt balance in full at maturity.
• ‍Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• Par-weighted refers to a method of calculating averages where the individual values are weighted by their par (face) value. This means that larger holdings or transactions have a greater influence on the final average.
• Post-GFC refers to the period following the Global Financial Crisis (GFC), which began in 2007-2008. This period is characterized by economic recovery, changes in financial regulation, and evolving global financial systems.
• A refinance (ReFies) refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• ‍Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• The 10-year treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.
• Total Return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period.‍
• Weighted Average Coupon is the average gross interest rate of the underlying mortgages in a mortgage-backed security at the time it was issued.
• Weighted-Average Rating Factor (WARF) is a numerical representation of the credit risk of a portfolio calculated by Moody’s.
• ‍Yield isa measure of the profit that an investor will be paid for investing in a stock or a bond. It is usually computed on an annual basis.
• Yield to worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.