In our series on portfolio construction [link] we looked at how liquid and illiquid loan managers assemble quality all-weather assets. Because of the contrasting characteristics and behaviors of BSL and middle market, PMs work differently to extract and maintain value.
In recent months, thanks to market volatility caused by higher interest rates, toppy inflation, and the perceived higher probability of a recession, large cap loan prices have traded down sharply. S&P/LCD’s leveraged loan index has dropped from 98.5 in February to 92 last week.
While an economic downturn would certainly increase the probability of loan defaults and losses, history shows that BSL default rates barely amounted to 8%...