A slowing economy leads rating agencies to downgrade loans. Since Collateralized Loan Obligations (CLOs) have strict limits on lower-rated debt, they become forced sellers. This flood of supply depresses prices further, creating a negative feedback loop that harms even fundamentally sound but downgraded assets.

A new, fast-growing segment is the middle-market CLO, which securitizes directly originated private credit loans instead of broadly syndicated ones. This structure represents a powerful convergence of liquid and private credit, growing from near-zero to 20% of total new CLO issuance and offering investors a new way to access private credit.

The credit market appears healthy based on tight average spreads, but this is misleading. A strong top 90% of the market pulls the average down, while the bottom 10% faces severe distress, with loans "dropping like a stone." The weight of prolonged high borrowing costs is creating a clear divide between healthy and struggling companies.

While the US private credit market is saturated, Europe's middle-market offers higher spreads (north of 600 basis points) and lower leverage. This opportunity is most pronounced in non-sponsor deals, a segment where large banks and public markets are less active, creating a lucrative niche.

A major segment of private credit isn't for LBOs, but large-scale financing for investment-grade companies against hard assets like data centers, pipelines, and aircraft. These customized, multi-billion dollar deals are often too complex or bespoke for public bond markets, creating a niche for direct lenders.

Unlike private equity (terminal value) or syndicated loans (interest-only), asset-based finance (ABF) provides front-loaded cash flows of both principal and interest. This structure inherently de-risks the investment over time, often returning significant capital before a potential default occurs.

The two credit markets are converging, creating a symbiotic relationship beneficial to both borrowers and investors. Instead of competing, they serve different needs, and savvy investors should combine them opportunistically rather than pitting them against each other.

The modern high-yield market is structurally different from its past. It's now composed of higher-quality issuers and has a shorter duration profile. While this limits potential upside returns compared to historical cycles, it also provides a cushion, capping the potential downside risk for investors.

Collateralized Loan Obligations (CLOs) have a structural covenant limiting their holdings of CCC-rated (or below) loans to typically 7.5% of the portfolio. As more loans are downgraded past this threshold, managers are forced to sell, even if they believe in the credit's long-term value. This creates artificial selling pressure and price distortions.