Alternative Credit outlook : Adapting to divergence and disruption

Diverging interest rate regimes

Central banks are expected to maintain their easing stance, which is broadly supportive of economic activity, real estate markets, and lowers financing costs for both businesses and households. However, a key divergence is emerging between the European Central Bank (ECB) and the US Federal Reserve (Fed).

The Fed faces constraints due to a stagnating US economy, limiting its ability to pursue aggressive easing. In contrast, the ECB has accelerated its easing in response to disinflation and weaker economic conditions. This divergence is reflected in market expectations for terminal rates, with implications for credit performance.

Notably, during the ECB’s negative rate period from 2015 to 2022, European corporates showed lower default rates than their US counterparts, and the same will likely play out for as long as interest rate trajectories diverge. 

Continued lower rates in Europe are expected to further support corporate stability, households, and real estate. This outlook is prompting a growing number of international investors to increase their exposure to private credit opportunities in Europe.

Higher market volatility creates opportunities

Recent trade wars and tariffs have increased market volatility, contributing to wider credit spreads in liquid alternative assets like loans (BSL) and alternative credit structured products (CLO/ABS). While uncertainty persists, this environment presents attractive entry points for high-quality senior assets with embedded structural protection against recession risks.

Private markets have remained relatively insulated due to their slower adjustment, typically lagging public markets by 3 - 6 months, though early signs of spread widening are emerging in our negotiations for private credit deals.

Corporate assets

Upward revision for European earnings

US corporate earnings for Q1 2025 exceeded expectations by around 8%[1], but tariffs have caused uncertainty, leading firms to delay future decisions and analysts to revise growth forecasts downward. In contrast, European earnings, though weaker, have surpassed expectations and improved economic sentiment in Europe has prompted analysts to raise their earnings projections.

Corporates still benefit from good access to capital

Loan issuance was strong in 2024, driven mainly by refinancing and opportunistic repricing, which made up two-thirds of activity. This trend continued in Q1, alongside a modest rise in M&A and LBO deals.

Large companies benefited from abundant liquidity amid strong competition between broadly syndicated loans (BSL) and direct lenders. The lines between private and public markets have blurred, with more direct lenders financing traditionally syndicated deals. This has helped companies extend maturities beyond 2025, pushing the main maturity wall to 2028–2032 and reducing refinancing risk.

M&A and LBO activity slower to rebound

Market volatility and swings in long-term rates may delay a full rebound in M&A and LBO activity in 2025. However, private equity firms face pressure to exit long-held investments - now averaging nearly six years - amid high rates and valuation uncertainty.

As rates decline, deal flow is expected to pick up, driven by the need to return capital to investors and deploy dry powder. This should support corporate direct lending, which currently holds around $250 billion ready to finance new transactions.

Consumer assets

Consumers are not overleveraged

Contrary to previous periods with elevated market volatility, consumers are entering this period with relatively low leverage, creating a positive backdrop for consumer-related credit assets.

Household balance sheets - particularly in developed markets - remain relatively healthy, supported by years of deleveraging, resilient labour markets, and accumulated savings. While inflation has strained disposable incomes, relatively low consumer debt reduces default risk and helps sustain consumption, though at a slower pace.

Economic uncertainty might weigh on future consumer spending

Global consumer confidence has declined since the introduction of tariffs, with US consumers hit hardest. University of Michigan’s survey shows US confidence at its lowest since 2022, even below 2008 crisis levels, potentially dampening spending.

However, strong labour markets and low unemployment across many countries support consumer credit fundamentals, as employment stability helps maintain borrowers' ability to repay loans. 

Weaker segments in the US are suffering from elevated rates

Consumer credit in the US and Europe remains broadly stable despite inflation, trade tensions, and higher financing costs. While delinquencies are rising, they remain below Global Financial Crisis levels. Prime consumer assets continue to perform well, with low and stable delinquency rates.

However, non-prime and non-conforming loans are showing signs of strain, especially among borrowers with weaker credit profiles and less stable income. In the US, credit cards, auto loans, and younger borrowers are particularly affected. The end of the COVID-era pause on student loan delinquencies has further pressured consumer credit.

Tariffs and economic uncertainty are also dampening consumer confidence and spending. As a result, there is growing performance dispersion in consumer credit, prompting a focus on prime exposures and caution toward more vulnerable segments.

Our convictions

• Positive outlook on Credit assets: Central banks - especially in Europe - are easing policies which is supporting economies, and recession risks appear to have subsided. Compared to the US, we are more optimistic on Europe’s outlook which is benefitting from improved economic indicators, lower energy costs, less impact from negative trade policies and supportive fiscal measures.
• Diversification to navigate uncertainty: Growth divergence across regions and increasing performance dispersion between sectors underscores the importance of selective asset allocation. In this environment, careful portfolio construction and robust diversification are essential to manage risk.
• Income will be key: Market volatility remains a key concern. In this context, income generation and income stability should be top considerations as investors review their overall allocations. Liquid alternative credit strategies offer flexibility and responsiveness in turbulent markets while private debt continues to provide attractive yields and downside protection through bespoke structuring and covenant-heavy lending.