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Crescent Capital Markets Q3 2022 Update

November 10, 2022

Crescent Capital Markets Q3 2022 Update

The third quarter of 2022 was a continuation of the challenges seen all year as the U.S. Fed continued to combat inflation with significant rate increases, the ongoing conflict in Ukraine and deteriorating global growth prospects.

Crescent Capital Markets Q3 2022 Update

Market Review

During the quarter, the US Fed raised rates twice, 75 basis points at the July and September FOMC meetings. As a result, US Treasury yields moved higher, with the 10-year ending the quarter at 3.83% and the 5-year at 4.09%. High yield bond yields widened to 9.58% but spreads tightened to 550 basis points; and in bank loans, yields widened to 8.47% in Q3. WTI oil prices ended Q3 at $79.49 / barrel, down 25% from last quarter. The S&P 500 returned - 4.89% in Q3 and -23.88% for the year.

Most major equity and fixed income asset classes suffered losses in Q3 including US high yield bonds which returned -0.68% as measured by the ICE BAML US High Yield index while leverage loans returned +1.37% as measured by the Morningstar LSTA Leveraged Loan index. Loans were the only asset class with a positive return for the quarter. Both asset classes managed to outperform all other markets including US Investment Grade, TIPs, Mortgages, Treasuries, Municipals, Emerging Market High Yield and the S&P 500 index for the quarter.

Most sectors were down in the high yield market; the best performing sectors were Transportation, Energy and Services and the worst performing sectors were Banking, Healthcare and Retail. For bank loans, the best performing sectors were Utilities, Real Estate and Energy and the worst performing sectors were Consumer Durables & Apparel, Health Care Equipment & Services and Software & Services. In terms of credit quality, BBs were the worst performers in high yield bonds given the move in rates. More specifically, BB bonds returned -0.88% underperforming B and CCC bonds by 31 and 67 basis points, respectively. Conversely, for loans, BBs returned +2.45% outperforming B and CCC loans by 127 and 417 basis points, respectively.

Quarterly fund flows were negative for both US high yield ($8.6 billion) and leveraged loans ($15.1 billion). For the year-to-date period, loans turned slightly negative at $32 million outflows and US high yield stood at $53.6 billion outflows. New issue volumes plummeted in Q3 amid a more hawkish Fed and a higher yielding environment with high yield bond issuance totaling only $18.9 billion gross in Q3, the lightest quarterly volume since Q1'09. Year to date, new issuance totaled $90 billion (gross) /$46 billion (net), which was down 78% and 69% year over year, respectively. Similarly, loan issuance totaled $24 billion gross which was the lightest quarterly volume since Q1'10. Year to date, leveraged loan issuance totaled $205 billion (gross) /$145.1 billion (net), which was down 69% and 50% year over year, respectively. Default rates moved slightly higher although they are still well below historical averages. The Moody's global LTM default rate for high yield bonds stood at 2.34% and for loans, it was 0.90% according to Morningstar LSTA at the end of Q3.

Market Outlook

Investors continue to face nothing but headwinds during 2022, triggering major losses across asset classes, with double-digit concurrent declines in equity and fixed income markets not seen in a generation. The good news is credit fundamentals were quite strong to start the year. Although moderating, we continue to expect most borrowers to exhibit revenue and cash flow growth in 2022, resulting in declining leverage ratios and a continuation of default rates near record lows. However, at the same time, we believe interest coverage ratios have likely peaked as benchmark rates (and floating coupons) begin to increase from historically low levels. We see heightened inflationary pressures and higher interest rates persisting into the second half of the year, leading to tightened financial conditions as the Fed has all but acknowledged they are behind the curve. Bond and loan coupons are likely to rise to multi-year highs by early 2023, potentially resulting in elevated refinancing risk for CCCrated, vulnerable borrowers. 

Special Note: Fed Policy Insight

The data central banks are looking for has not materialized yet. The U.S. labor market remains tight. U.S. bond yields will likely continue to rise until the labor market cools. Inflation is still not showing material progress despite consistent rate hikes from the Fed. It looks like the Fed may be laying the groundwork for a slowdown in the pace of hikes after adding 75 bps at the November meeting. That is a pivot of sorts but not a full one, which would be the end of rate hikes following a declaration that inflation is under control. This could potentially be viewed as an extension to the rate hiking cycle. It is unclear how investors would react to slowing (hikes of 25 bps instead of 75 bps) instead of stopping. Until central banks see the data they want to see we don’t expect them to change their tune and turn dovish. 

Crescent Capital Group compliments and extends SLC Management’s fixed income pillar. With over 30 years in investment management, Crescent is known for a consistent track record in below investment grade capabilities.

 

Learn more about our speciality managers
 

This document expresses the views of the author as of the date indicated and such views are subject to change without notice. Neither the author nor Crescent Capital Group LP (“Crescent) has any duty or obligation to update the information contained herein. Further, Crescent makes no representation, and it should not be assumed, that past investment performance is an indication of future results.

Crescent makes this document available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Nor is the information intended to be nor should it be construed to be investment advice. Certain information contained herein concerning economic trends and performance may be based on or derived from information provided by independent third-party sources. The author and Crescent believe that the sources from which such information has been obtained are reliable; however, neither can guarantee the accuracy of such information nor have independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This document, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Crescent.

SLC-20221108-2583085

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About SLC Management

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate.

Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and in Ontario, a commodity trading manager. Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association.

BentallGreenOak, InfraRed Capital Partners (InfraRed) and Crescent Capital Group (Crescent)  are also part of SLC Management.

Bentall Green Oak is a global real estate investment management advisor and a provider of real estate services. In the U.S., real estate mandates are offered by BentallGreenOak (U.S.) Limited Partnership, who is registered with the SEC as an investment adviser, or Sun Life Institutional Distributors (U.S.) LLC, an SEC registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”) . In Canada, real estate mandates are offered by BentallGreenOak (Canada) Limited Partnership, BGO Capital (Canada) Inc. or Sun Life Capital Management (Canada) Inc. BGO Capital (Canada) Inc. is a Canadian registered portfolio manager and exempt market dealer and is registered as an investment fund manager in British Columbia, Ontario and Quebec.

InfraRed Capital Partners is an international investment manager focused on infrastructure. Operating worldwide, InfraRed manages equity capital in multiple private and listed funds, primarily for institutional investors across the globe. InfraRed Capital Partners Ltd. is authorized and regulated in the UK by the Financial Conduct Authority.

Crescent Capital Group is a global alternative credit investment asset manager registered with the U.S. Securities and Exchange Commission as an investment adviser. Crescent provides private credit financing (including senior, unitranche and junior debt) to middle-market companies in the U.S. and Europe, and invests in high-yield bonds and broadly syndicated loans.

Securities will only be offered and sold in compliance with applicable securities laws.

Website content

The content of this website is intended for institutional investors only. It is not for retail use or distribution to individual investors. All investments involve risk including the possible loss of capital. This website is for informational and educational purposes only. Past performance is not a guarantee of future results.

The information contained in this website is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained on this website. The assets under management (AUM) represent the combined AUM of Sun Life Capital Management (Canada) Inc., Sun Life Capital Management (U.S) LLC, BentallGreenOak and InfraRed Capital Partners.

AUM as of December 31, 2022. Total AUM includes approximately $10B in cash, other, and unfunded commitments.

Currency conversion rate: USD$1.00 = CAD$1.3549 as of December 31, 2022.

Total AUM includes approximately $10B in cash, other, and unfunded commitments.

UK Tax Strategy - InfraRed (UK) Holdco 2020 Limited

InfraRed (UK) Holdco 2020 Ltd is the UK holding company of InfraRed Partners LLP and a subsidiary of Sun Life (U.S.) Holdco 2020 Inc, which has its headquarters in the U.S. The company was incorporated to purchase InfraRed Partners LLP and acts solely as a passive holding company. The Tax Strategy for the InfraRed Holdco Group sets out our approach to the management of InfraRed Holdco Group UK tax affairs in supporting business activities in the UK. 

This UK tax strategy is published in accordance with the requirements set out in Schedule 19 of Finance Act 2016. The strategy, which has been approved by the Board of Directors of InfraRed (UK) Holdco 2020 Ltd, is effective for the period ending 31 December 2022. It applies to InfraRed (UK) Holdco 2020 Ltd and its dormant subsidiary Sun Life (UK) Designated Member Ltd, referred to as the “InfraRed Holdco Group”. InfraRed Holdco Group.

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