Investcorp Credit Management said it expects “compelling investment opportunities” for its funds in 2022, giving a bullish outlook for the leveraged loan market due to strong demand.

In its house view on global credit markets, the biggest private equity and alternative asset manager in the Middle East said robust credit market performance is expected, driven by continued global economic recovery, favorable credit fundamentals and strong loan demand.

“We strongly believe that through careful portfolio construction, in particular, a focus on larger-cap issuers and avoidance of high inflation risk sectors, along with active portfolio management, we can position our leveraged loan portfolios to cope with inflationary impacts while benefitting from potential rate rises,” said Jeremy Ghose, Managing Partner and CEO.

“Overall, we expect 2022 to provide compelling investment opportunities for our Funds.

“Given our market position, we believe that we are well placed to continue to benefit from the well-priced primary issuance we have seen recently and to use this to rotate portfolios to increase yields.”

The company said it expects the global environment for credit to remain favorable throughout the coming quarter.

From an asset perspective, global large-cap leveraged loan markets are generally well positioned to continue to perform well in inflationary conditions, it said.

Risk of rate hikes

Rate increases, despite being beneficial for returns, also create additional risk from increased borrowing costs over the medium term which may lead to additional credit risk across markets.

“Investcorp’s view is that this would also tend to favor large-cap issuers over smaller cap issuers,” the report said.

David Moffitt, Co-Head of US Credit Management at Investcorp said: “The US credit market benefited from similar tailwinds to its European counterpart last year.

“Credit spreads are near decade lows reflecting strong fundamentals, the benign outlook for defaults and strong demand for leveraged loans from collateral loan obligation (CLO) origination. 

“We continue to look to drive value and outperformance in our strategies through an increasingly active trading and portfolio management approach, rooted in fundamental analysis, focused on identifying opportunities for capturing total return and convexity.

Challenges in 2022

“We see the potential for increasing inflation and corresponding policy adjustments as potential challenges in 2022,” Investcorp said.   

Philip Yeates, head of European Credit Funds at Investcorp said: “The European credit market continued to exhibit high levels of resilience in Q421, culminating in another year of record issuance.

“From a credit risk perspective, our focus remains on the potential impact of inflation across the market. However, we expect the issuers we target within the European market to remain resilient in the face of inflationary headwinds given their relative size.

“We expect that 2022 will deliver more opportunity to diversify risk and rotate our portfolios in order to increase yields.”

(Reporting by Imogen Lillywhite; editing by  Seban Scaria)

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