Leverage credit market update - April 14, 2025

Over the past 2 weeks, the administration announced sweeping tariffs aimed at addressing country-specific trade deficits. The markets quickly caught up to the math, digested the implications and began questioning the pathway to achieving the desired economic balance. The result: A broad-based selloff.

In response to the market volatility and potential macroeconomic repercussions, the administration paused the implementation of these tariffs. China was notably excluded from the tariff measures; however, the inclusion of certain electronic goods in the scope effectively serves as an indirect benefit to China. While equities have bounced over the past day and a half, they remain well below pre-announcement levels, reflecting lingering uncertainty amid selective pauses and opaque exemptions.

Credit Market Impacts:

In the leveraged loan market, the tone has clearly shifted. YTD, loans are down 3 - 4 points. CCC-rated credits have declined at least 5-6 points. Even BBs—typically more resilient—are down ~2 pts.

CLOs, the largest buyers of loans, are also feeling the pressure. Secondary CLO AAA spreads have widened 35 bps YTD to approximately 160 bps. The new issue CLO market has yet to reflect this move, but if spreads remain at these levels, the CLO engine may freeze—complicating the ability to clear new deals. Whether private credit steps in to fill the gap remains to be seen. Regardless, new issue spreads will be moving wider, and according to me, the 3-4 point decline in overall bid levels is insufficient to offset these self-inflicted macro risks.

Finding Opportunity Amid Uncertainty:

Despite the drumbeat of negative headlines, it's worth remembering that some of the best investment vintages emerge from periods of volatility. In strong markets, investors often lament tight spreads and aggressive deal structures. In stressed markets, the temptation is to extrapolate current conditions indefinitely and retreat to the sidelines.

But this is precisely when opportunities emerge. Astute investors look beyond the noise, assume eventual normalization for the majority of issuers, and allocate capital with a forward-looking lens. That means doing the work—independent, fundamental, modeling-intensive analysis—without over-reliance on rating agencies or talking heads.