Corporate Credit Highlights

• J.P. Morgan Strategy on fourth-quarter investment-grade (IG) fundamentals: “Credit metrics for investment-grade issuers in 2024 improved on almost every metric. Revenue, EBITDA, and margins all went up while leverage was stable. There was deterioration in interest coverage, but at a slower pace than in prior quarters. Capex rose, led by tech and utilities, a shift from energy which had until recently been the primary driver. Debt grew modestly and the ratio of payouts-to-shareholders as a share of EBITDA is near an eight-year low. Bothof these trends are evidence that corporate America continues to manage balance sheets cautiously. Thus, credit metrics look robust enough in aggregate to cushion fora potential growth slowdown in 2025..” ¹
• Goldman Sachs Strategy revising its 2025 investment-grade (IG) supply forecast lower: “We are reducing our full-year gross supply forecast for the USD IG market to $1.6 trillion, down from $1.75 trillion. M&A activity has been a key factor in driving IG issuance. A consequence of the reduced M&A activity (in addition to the downgrade in growth expectations) is that IG supply will likely be lower than we had initially thought. USD IG gross supply ended 2024 at $1.6trillion, so our new forecast implies a slight 3.8% deceleration from last year’s pace of issuance. Reading this through to net issuance we are also trimming that forecast back to $700 billion, down from $750 billion previously. This reduction to our USD IG supply forecasts, while marginally positive from a technical tailwind standpoint, is not enough to change our expectations for spreads. ²
• J.P. Morgan Strategy on first-quarter investment-grade (IG) performance for the asset class: “Worse quarter for spreads (+18 basis points) since second quarter 2022. Spreads wider three months in a row, have not widened more than three months in a row since February through June 2018 (50 basis points of rate hikes then). Despite the above, total return for the quarter (2.3%) is just 30 basis points behind all of 2024 (2.6%). This shows the positive impact of starting the year with the highest total return breakeven (82 basis points) since 2009. Largest outperformance vs the S&P 500 Index since Q3 2022, but only the 2ndquarter of outperformance vs the S&P since COVID (out of 20).” ³

• LCD note on loan price decline: “… this was the largest monthly decline for the average bid since October 2023. The weighted average bid had declined by 120 basis points from the end of January, the steepest decline over a two-month period since September 2022. In addition, the share of loans priced at par or higher deflated swiftly across the full credit quality spectrum, indicating weaker investor demand for loans. By the end of March, only 22% of loans issued to companies rated BB-minus fell into the par-or-better bucket, down from 46% at the end of February and from the 84% peak in January. Similarly, only 12% of the lower-rated, B-minus cohort was priced at par or higher at the end of the quarter, versus a 54% high in mid-January.” ⁴
• LCD first-quarter loan recap: “Despite the slowdown, the first quarter featured $351 billion of transactions overall, including repricings. It’s the fourth-highest quarterly reading on record, anchored by a frenzied January. Repricings account for 53% of year-to-date activity, with another 18% supporting refinancings. The repricing wave retreated entirely in March. The U.S. leveraged-loan market slump accelerated while investors reevaluated their outlooks amid increasing uncertainty and volatility. The steady beat of tariff headlines and comments from the White House have investors worried about the potential for a recession and the rekindling of inflation, weighing on risk assets broadly. As a result, secondary loan prices tumbled. The weighted average bid of the Morningstar LSTA US Leveraged Loan Index retreated by 75 basis points in the month to March 19, to 96.40, the lowest level since mid-August.” ⁵
• Morgan Stanley Strategy revising its default forecast for 2025 higher: “We revise up 2025 default forecasts to 3% in high yield and 4% in loans. Slower growth and less policy easing pose increasing risk for credits down the quality spectrum. We continue to see a sticky default cycle as the distressed cohorts are relatively confined and set to slowly get cleared out of the pipeline. The updated macro-outlook from our economics team implies a slower pace of default normalization. Defaults will continue to skew to distressed exchanges, in our view, and weexpect a modest mean-reversion in terms of the soft-versus-hard default split. Sponsors and management teams are still looking to preserve equity values while utilizing liability management exercises (LMEs) to bridge through near-termstress. Meanwhile, the growing list of borrowers with prior credit events face fewer options and may have to come to terms with an eventual bankruptcyprotection filing. We will expand on our revised default outlook in an upcomingreport; for now, we post these updated numbers as inputs for the full-yearreturn targets.” ⁶‍
• J.P. Morgan Strategy on public vs. private loans: “Of 1,258 unique issuers in the leveraged-loan (LL) universe, only 300 or 24% are public companies with equities and 76% are private. Notably, the number of private LL companies has grown by 198 since year-end 2015 (26%) versus a five-issuer increase in the number of public companies (2%). Meanwhile, the spread gap between public (330 basis points) and private (475 basis points) LL companies is 145 basis points, which compares to 189 basis points at year-end 2023 and 188 basis points five-year average. Notably, 57%, 22%, 7%, 5%, and 24% of BB, B1, B2, B3, and CCC loan companies, respectively, are public versus 43%, 78%, 93%, 95%, and 76% for private companies. Because of a carry advantage, private LL issuers have historically outperformed public issuers. That said the private cohort is lagging in early 2025 with growth concerns fueling underperformance in lower-rated loans.” ⁷

• Barclays overview of March high-yield (HY) performance for the index: “The high-yield index produced total returns of -1.02% last month. Rates were mixed, with 5-year Treasuries down 7 basis points and 10-year Treasuries unchanged, leading to excess returns of -1.51%. Higher-quality bonds outperformed. On a total return basis, the Ba Index shed 51bp, the B Index was down 1.26%, and the Caa Index returned -2.24%. Distressed issuers rated Ca and below produced -3.02%. Excess returns for the sub-indices, in descending order of quality, were -0.99%, -1.75%, and -2.73%, with distressed issuers returning -3.51%. ... Most sectors were down last month. The worst performing were transportation services (-4.33%), pharmaceuticals (-2.49%), packaging (-2.13%), building materials (-2.11%), and paper (-1.82%). The best performing were wireless (+36 basis points), environmental (+7 basis points), supermarkets (+2 basis points), aerospace/defense (-1 basis points), and food and beverage (-13 basis points).” ⁸
• Morgan Stanley on increasing liability management exercises (LME) activity: “One distinct feature of this default cycle is the growing prevalence of LME. This was reflected in the rising share of distressed exchanges (DEs) over all defaults in both HY and leveraged-loan markets. … Defaults in the loan market used to be predominantly bankruptcies, which made up about 75% of all defaults around eight years ago. In this default cycle, distressed exchanges surged sharply to about 70% of all defaults in 2024, as borrowers and sponsors turned to amend-to-extend to pushout maturities before filing for bankruptcy protection in court. Along with the growing popularity of such out-of-court restructuring, borrowers and sponsors have been actively exploring aggressive tactics in liability management, aided by the weak covenant protections and the sponsor-heavy nature of the loan market.” ⁹
• J.P. Morgan Strategy on fallen angels in high-yield (HY): “The cohort of potential fallen angels has risen off a low level based on a screen using rating permutations and market pricing. Fallen angel volume totals $19.1 billion year-to-date following $9.6 billion in 2024, $13.9 billion in 2023 and 2020’s record of $218.6 billion. Most of the erosion in agency trends is occurring down in credit quality. That said there are $974 billion of bonds rated BBB (-) by at least one of three rating agencies, which is sizeable considering the developed-markets HY market stands at about $1.5 trillion. Note $309 billion of BBB (-) debt is on negative watch/outlook by at least one of three rating agencies, of which $219 billion is at risk of transitioning from investment-grade to high-yield indices in the intermediate term using a few permutations (i.e., one or two agency actions). Notably, this cohort includes CVS Health Corp. ($53.5 billion), Ford Motor Co. ($52.0 billion), Boeing Co. ($46.2 billion), Crown Castle Inc. ($19.5 billion), and Paramount Global ($13.0 billion) among others. Note not one of the three largest issuers is anticipated to be downgraded to HY. Another interesting exercise is to assess prospects for fallen angels by utilizing spreads on the underlying bonds. This analysis too yields a concentrated cohort. There is $36 billion of non-financial BBB (-) rated bonds trading with a duration weighted spreads wide of 195 basis points, which includes Warner Bros Discovery Inc. ($31.1 billion), APA Corp. ($2.1 billion), among others.” ¹⁰ ‍
• J.P. Morgan Strategy on high-yield (HY) sector concentration: “The largest discrepancy in weightings among sectors in the bond and loan indices are energy (11.6% bonds, 2.7% loans), technology (15.2% loans, 6.2% bonds), services (11.5% loans, 6.1% bonds), cable/satellite (7.5% bonds vs. 2.7% loans), and healthcare (10.9%loans vs. 7.8% bonds). Energy has been the largest sector for bonds since 2010 and technology for loans since 2015. The three largest sectors in the HY and loan indices account for 29.6% and 37.7%, respectively (i.e., loan index more concentrated). The most heavily exposed bond sectors to BBs are utility (81.7%) and metals/mining (75.5%), while utility (65.9%) and gaming/lodging/leisure (56.2%) are the most exposed loan sectors. And the most heavily exposed bond sectors to CCCs are telecom (41.4%) and cable/satellite (36.3%), while utility (0%) and transportation (1.5%) are the least exposed.” ¹¹

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.
• 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.‍
• 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.
• An exchange-traded fund (ETF) isa type of pooled investment security that operates much like a mutual fund.
• 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.
• 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.
• Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• 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.
• 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.