The world we live in today would have been difficult to imagine just a few years ago. A surge in protectionist policies from the U.S., targeting Canada, Mexico, China, and Europe, now threatens to derail global economic growth. While some argue that escalating trade tensions could disrupt the declining trend of inflation, the broader consequences for investment and corporate strategy remain concerning. A trade war with key partners, who will inevitably retaliate, poses a significant risk for 2025 and beyond. As these tensions unfold, corporate decision-makers and investors must brace for the impact. Savvy credit investors are already scrutinizing their portfolios, identifying vulnerable credit names exposed to these threats. The open, multilateral trade system that has fueled global economic expansion for decades is now under pressure. This new wave of tariffs—broader and more aggressive than those imposed by Trump in 2018/2019—will likely hinder economic growth rather than yield positive benefits. The extent to which the American industry will gain from these measures remains highly uncertain. While some investors may dismiss the volatility as temporary, I see a fundamental shift underway. Underestimating the effects of tariffs on industries such as retail, durable goods, chemicals, and packaging could prove to be a costly mistake. Despite these risks, credit markets are unlikely to see an immediate realignment. The scarcity of investable credits and ongoing repricings in leveraged finance continue to constrain shifts in CLO collateral pools, keeping risk exposures largely intact. As a result, the prevailing strategy appears to be cautious observation rather than immediate action. It’s also important to consider how credit markets today differ from those during the 2018–2019 trade war. While spreads remain tight, the interest rate environment has changed dramatically. The Fed Funds rate now stands at 4.25%–4.50%, compared to just 2% at the end of 2019. The 5-year U.S. yield sits at 4.32%, up from around 1.8% in Q4 2019, while the European swap curve, once negative, has risen sharply. Whether these higher rates will help cushion widening credit risk premiums remains uncertain. One thing is clear: credit valuations are stretched, and portfolio adjustments should prioritize selling positions with limited upside potential. The landscape is shifting, and ignoring these developments could lead to avoidable missteps in credit markets. Key points to highlight at the beginning of February after four central bank meetings, where only the Federal Reserve remained on hold, raising the bar for future rate cuts in 2025: **A)** The repricing wave of loans and bonds is showing no signs of abating. Issuers continue to take advantage of sustained investor demand for leverage paper. Old vintage deals which remain untouched in this tightening yield environment are becoming increasingly rare. Issuers are wasting no time to slash margins on existing transactions with the average time between repricing and the original deal at much less than 12 months. When soft call premium become set to expire the investors know already that the borrower is a repricing candidate. More than 12 months ago I warned about the potential threat of repeating what happened in 2017 and the first months of 2018 when the loan market (let’s leave aside the bonds for a moment) repriced on average by more than 70 basis points the majority of the leverage loans. My prediction written in March 2024 proved to be more accurate than some research analysis I had the possibility to read at that time (I was more precise in identifying the collateral subject to repricing and the margin adjustment). 2025 started with more aggressive margin compression. The investors, mainly CLOs, have no choice but to put up with the current spate of repricings. The bond market is not immune for this and yields remain under pressure. It is not necessary to say that many credit names are mispriced for their risk qualities while pricing tension is far from being resolved. **B)** The following lines evidence the differences in basis point spreads for current CLOs and the ones which priced at the end of 2019, beginning of 2020 before COVID. The numbers speak for themselves. 2025: AAA 125 , AA 180, A 200, BBB- 290, BB-480,B-765 Beginning 2020 pre COVID: AAA 94, AA 170, A 210, BBB- 320,BB- 540, B- 815. The key points are clear. For CLO platforms, the weighted average cost of liabilities (WAS) remains high, hovering around 180–190 basis points, with less-performing managers facing even higher costs. Reset old vintages with no performing portfolios always bring difficulties. On the liabilities side, investors may find the lower part of the capital stack excessively tight, while spreads on AAAs and AAs remain wide (for comparison, as of July 2024, AAAs were around 130 bps, BBs at 600 bps, and Bs at 840 bps). Analyzing spread pickup across tranches as an alternative way to assess spread movements, we see that all spread correlations are well outside of their historical medians over 3-, 5-, and 7-year periods. Additionally, basis value trades against IG and HY cash OAS (which are already tight) appear stretched from BBB- down to B- structured notes. Once more, historical data should not be interpreted as a reliable signs of actual values and forecasts of future trends. Estimating the quality of the new issue arbitrage—using the gap between CLO funding costs and the median CLO portfolio WAS—remains challenging. Some new portfolios are launched with excessively high WAS assumptions, while others rely on more illiquid holdings or aggressively structured pools to chase higher-yielding loans and bonds. This isn’t surprising, given that the WARF on post-crisis Euro CLOs—which have always grappled with spread issues—has steadily increased since mid-to-late 2016. As I have consistently argued, current positive credit market conditions are constraining managers' allocation strategies and trading flexibility. Excessive bullish sentiment and a risk-on approach tend to compress the leeway against key CLO securitization metrics complicating the work of the portfolio manager. This may seem counterintuitive, but it is indeed the case. Defaults should ease over the year, and equity payments are expected to average 12–14% annually on par notional. However, recent coupon payments have been normalizing since Q2 2024, gradually returning toward their long-term average. Within this IRR range, we will observe significant dispersion in asset quality (this has been the trend over the last 15 months). In my view, it’s still too early to fully assess the technical factors, such as ETFs (exchange traded fund) participation in CLO tranches and third-party involvement in new issuance compared to previous years. The latter, in my opinion, is distorting the natural supply-demand balance of the asset class and impacting the funding costs of all market. At the same time, ETFs represent a significant financial innovation which appears to be good for managers and investors. If Europe will follow the US, the popularity of the product will be massive. ETFs on CLO tranches have yet to be tested in periods of market volatility, and we will need to analyze and understand investors behavior in such conditions (AUM numbers do not rise under any market circumstances). As I noted in another post, other structured products are emerging with strong risk/reward profiles, including Mezzanine ABS, CMBS, and Receivables. Several European managers are exploring opportunities to expand their business and footprint into the middle-market CLO space, following the pricing of Barings EUR Middle Market CLO in late 2024. I previously wrote about this European vehicle, and I do not see that experience as easily repeatable. The key challenges remain collateral sourcing, diversification, and arbitrage spreads for equity investors. When I speak with European managers, I continue to see difficulties and misunderstandings. Investors seem keen to buy the new product because of diversification strategy. **C)** Intense competition between public and private credit is keeping the private vs. public spread premium tight. The competition between the two markets is fierce: this dynamic shapes the major headlines. But in this post, I would like to refer to a recent article published on February 6th by the FT, titled "In Private Credit, Liquidity is Bad," which outlines the broad factors of the asset class. There are written the main broad factors of the asset class: 1) Private debt markets serve borrowers unsuited to public bonds or syndicated loans due to complexity, lack of credit rating, or confidentiality needs. 2) The borrowers accept higher costs in exchange for pricing certainty and execution reliability. 3) Private debt features stricter, tailored contracts with covenants that protect lenders from asset shifts and excessive borrowing. 4) It avoids visible market price fluctuations, reducing apparent volatility. 5) The direct lender-borrower relationship enhances recovery prospects in financial distress, as lenders are incentivized to support borrowers through challenges, often fostering long-term partnerships. Whether “_those virtues_” (as the FT calls them) still hold in 2025 remains open to debate—I personally question whether they have endured in their original form or have gradually been watered down. While some factors may be cyclical in nature, others are not as impactful as the marketing materials of many private lenders suggest. I truly believe private debt lenders should pursue greater specialization, with public markets continuing to attract larger, higher-quality deals, while private markets focus on smaller or riskier transactions requiring bespoke capital solutions. Ideally, I would like to see greater involvement in the subordinated tier of the capital stack, addressing specific borrower needs with flexible terms and structures, such as PIK securities and delayed-draw term loans when these solutions fit the company’s balance sheet. Even the major corporations can enjoy these benefits. Private lenders are remunerated for the complexity and risk by higher management fees: it is time to look at other stuff.

A Recap of the Beginning of 2025