The case for resilient high yield private credit

With inflation lingering and rates moving at a much slower pace than expected, infrastructure debt, particularly in the higher-quality sub-investment grade space, offers attractive returns and resilience for investors seeking a safe haven in a changeable market, explain Infranity experts.

• We strongly believe that now is the right time for asset-backed lending with strong and resilient cash flows.

• We see a lot of attractive relative value infrastructure opportunities from traditional investment grade to the younger and more dynamic sub-investment grade (sub-IG) space.

• There is a sweet spot in the BB-rated segment, where default or loss rates are only marginally higher compared to loans with investment grade quality, but investors can harvest an attractive yield pick-up.

‘Transitory inflation’ was the talk of the town when inflation picked up for the first time towards H2 2021 and then more forcefully following the war in Ukraine, the energy crisis and the shift in central bank policy in major markets around the world. It was all supposed to be a quick affair, with central banks getting inflation under control quickly via sharp rises in interest rates. Interest rates would then fall quickly and settle in or at least around the same low territory they occupied in years prior.

Today, however, markets have stubbornly refused to return to their pre- crisis inflation and interest rate levels and the days of ‘low for longer’ are long gone and not expected to return any time soon. Finally, even longer-term  investors have begun to adjust their allocations to the new market regime. Since early 2023, the macroeconomic landscape has manifested itself towards an environment with sticky inflation and higher interest rates. While it’s true that inflation is moving towards the levels targeted by central banks, it is increasingly clear that this happens slower than anticipated. As a consequence, rates are moving at a much slower pace than expected, too. 

Infrastructure debt shines in a higher-for-longer world

From our perspective, higher interest rates over a prolonged period can possibly impact  a borrower’s  ability to service debt obligations over a credit cycle, which can lead to performance dispersion between managers. While entry levels for liquid or illiquid speculative grade investments  look  attractive,  it is  important  to  re-evaluate  those allocations in the context of the new market regime. In high yield there are many different shades of credit quality, which in the current market  environment, makes it necessary to  be highly  selective  to ensure that attractive yield levels can be captured while mitigating downside risks as well as negative rating migration scenarios at the same time. We strongly believe that now is the right time for asset- backed lending with  strong and resilient  cash flows.  Especially in the context of infrastructure  we see a lot of attractive relative value investment  opportunities  across the  spectrum  with  resilient  credit quality, be that in the traditional  investment grade segment of the market or in the younger and more dynamic sub-investment  grade (sub-IG) space.

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