Investment Funds 2023 Outlook: Weakening Collateral, Good Over-Collateralization
Our outlook for 2023 is murky given the strong negatives and positives that are expected to affect investment fund debt over the coming year. Critically, we anticipate weakening metrics in the underlying collateral pools that back investment fund debt. Elevated inflation levels and rising interest rates will drive an increase in leveraged loan defaults, particularly for lower-rated borrowers. While this weakening of corporate debt collateral will bring challenges to the sector, we expect that structural soundness in our rated transactions, with good over-collateralization (OC) for investment fund debt, will be supportive of stable debt ratings. Furthermore, market dynamics are creating a tailwind for investment funds, which could be sufficient to offset macroeconomic headwinds.
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