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Investing in Credit

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There are many different ways to invest in the credit markets. These investments range from highly rated investment grade securities to riskier and higher-yielding securities. They can also include bonds from emerging market nations. The credit market has become a popular option for investors due to its global opportunity set and potential for high yields.

One of the most common methods of investing in credit is through a bank loan, which is a form of senior secured debt instrument. Bank loans typically have financial covenants requiring the borrower to meet minimum financial performance requirements, usually on a quarterly basis. Interest rate risk is another common risk associated with credit investing. If a borrower defaults on the loan, it will affect the overall return to the lender.

Credit investment professionals have to navigate rapidly changing market conditions and competition for deals. Many of these professionals are part of investment management teams that represent fund sponsors and specialize in credit-related investment strategies. These professionals have experience in loan origination, structured credit, asset-backed securities, CLOs, and distressed debt. Many also work in the nonperforming loan pool space.

The global search for yield continues to be a major factor in today’s market environment. As interest rates rise and the fear of defaults grows, investors are increasingly turning to private credit. This asset class offers relatively high spreads over public markets, covenants (lender protection), and asset-based inflation protection. Moreover, due to its lower liquidity, private credit investments are likely to continue to exhibit low volatility.

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