Q1 2025: Investment Grade Private Credit update
Credit markets reported considerable year-over-year deal activity, with investor demand a principal driver. Meanwhile, continued development, expansion and innovation in the asset-backed finance (ABF) space requires a renewed perspective into the possible benefits and risks of these investments.
Market statistics for the private placement market sourced from Private Placement Monitor, a standard proxy for the investment grade (IG) private credit market. Other market data supplied by Bloomberg.
Markets
Corporate private debt markets experienced tremendous demand and record activity in the first quarter of 2025. January was particularly active compared to the previous year, with numerous new issuances. The quarter closed with a record volume of close to US$32 billion, slightly ahead of Q4 2024, and a significant (38%) increase over the same period last year. We saw over 91 new issuances in the quarter with four deals closing at over US$1 billion. The largest deal was a project financing transaction in Latin America at US$1.5 billion, followed by a US$1.4 billion transaction in the industrial sector (in a sporting league) in the U.S. This was a continuation of the trend we’ve seen over the last couple of years of the increasing number of large transactions successfully marketed and issued in syndicated markets.
The sector leader in both volume and number of issuances was industrials, specifically service, technology and energy. On the other hand, the volume of issuance in the financials and utilities sectors were lower compared to the same period last year, albeit still a material portion of new issuances. Another hallmark of the quarter was an increase in the percentage of non-U.S.-dollar transaction volume, predominantly led by European issuers tapping U.S. markets for fundraising.
Investor demand was extremely high at the start the year. Almost every broadly syndicated corporate transaction was oversubscribed by 5–8 times, and in certain instances materially higher (15 times) compared to the initial volume ask of the issuer. Despite some issuers deciding to take on more debt than initially stated on cover (partially contributing to the increase in delayed-draw fundings in the quarter), the oversubscriptions led to significant downward price pressure on transactions. We frequently saw final spreads on issues tightening by 10–15 bps and at times as much as 20–35 bps from the initial price guidance prior to bids. The relative value compared to public spreads also saw some tightening compared to the similar period last year.
Outlook
While we anticipate the year to remain competitive with high demand from investors, further market disruptions and regulatory policy could impact investor appetite and activity in specific sectors, leading to price volatility in those sectors. We have observed the beginning of investor hesitation when dealing with certain sectors that were previously considered safe havens and low risk due to ties to the U.S. government. Although the impact has not yet been fully absorbed by the markets, the biggest risks remain uncertainty and unpredictability. On the corporate side, sectors that have been most impacted include those directly tied to tariff conflicts (e.g., auto, construction and manufacturing sectors), those affected by specific actions (such as large layoffs at various government departments or lack of funding for certain projects) and those experiencing secondary impacts from dampened cross-border activity (e.g., airlines/aviation, university enrollment or skilled labor availability).
In focus
The evolving definition of asset-backed finance
Private ABF is a growing segment of the private credit market, continuing to evolve into a wide range of investment opportunities backed by contractual cash flows and assets. These include consumer and small business loans, mortgages, lease arrangements, royalty streams and other monetizable receivables. The ongoing innovation in this asset class has expanded the universe of potential investments, emphasizing the need for a deeper understanding of both the benefits and risks involved.
One of the primary advantages of ABF is its structure. ABFs utilize a bankruptcy-remote vehicle to hold contractual cash flow and assets, typically at a discount, which creates overcollateralization. These vehicles, fully controlled by the lender, typically have built in cash sweep mechanisms that stem from a diversified pool of underlying contracts, thereby fostering amortization over time. This structure differs from traditional corporate lending, in which loans are backed by the operating income from going-concern businesses, often structured as bullet maturities that rely on refinancing at maturity to repay the original loan balance. Additionally, ABF structures tend to be shorter-term and covenant heavy, providing appropriate guardrails to govern the performance of the underlying assets.
These financing tools have the potential to grow alongside the businesses that originate their underlying contractual cash flows. Moreover, ABF offers benefits not only to borrowers but also to investors. Apart from providing investments tailored to the businesses, it presents compelling and differentiated investment opportunities, allowing for customized exposures in terms of risk, return, rating and duration. This customization is particularly valuable for investors with constrained liabilities, as it enables them to adjust their investments to specific needs and objectives.
An expanding universe
ABF has progressed beyond its asset-backed security (ABS) roots, with the current market showcasing the potential breadth of assets that can be included under the current unconstrained definition. Such assets can include securitizations of music royalties, aircraft leases, data infrastructure and fund finance. Fund finance can be broadly characterized as a form of financing supported by some combination of an investment fund’s assets, cash flows and ability to call capital from its limited partners (for more information, consult our previous update on net asset value (NAV) lending).
We expect innovation to continue to shape the ABF market, with new sectors and structures expanding the depth and breadth of this investment universe. We broadly classify core ABF asset classes along three verticals:
Consumer |
Commercial |
Fund finance |
|---|---|---|
Prime auto |
Transportation |
Primary NAV |
Non-prime auto |
Vehicle fleets |
Secondary NAV |
Home improvement loans |
Mid-ticket equipment |
Lender finance |
Credit card receivables |
Small-ticket equipment |
Subscription lines |
Private student loans |
Solar |
General partner financing |
Unsecured loans |
Data centers |
|
|
Aviation |
|
|
Music royalties |
|
|
Solar |
|
|
Litigation receivables |
|
|
Small business loans |
|
|
Manufactured homes |
The use of structuring and asset base diversification can come together to engineer an IG profile from non-IG collateral. However, this requires that investors have a deep understanding of IG and non-IG credit, as well as legal and financial structuring considerations. This is particularly important as asset bases reach into longer cash flow streams (typically taking the form of leases or royalties) to preserve the fundamentals and structure of an IG profile over potentially extended periods of time. Continuous innovation and transaction complexity requires an experienced and steady hand to navigate. For example, the major credit rating agencies typically develop rating methodologies for more established sectors, though newer sectors lack a published rating methodology – this lag creates complexity that requires deep expertise to navigate. This complexity can result in strong risk–return characteristics for ABF, which can endure throughout market cycles.
Key risks and other considerations
As previously mentioned, any investment in the ABF space requires a deep understanding of credit markets and the underlying asset class. Investors should be mindful of the considerations and risk factors highlighted below:
- A breadth of sub-strategies – The type of collateral, deal structure, cash flow profile and attachment/detachment points can vary significantly from one ABF sub-strategy to the next. Navigating the ABF market requires experience and a comprehensive understanding of the wide range of asset bases in this investment universe. The expertise required can cross a multitude of segments/niches and durations.
- Understanding of unique risks – An effective investment strategy requires accurate insight into the level of actual credit diversification in the portfolio, with any areas of concentration (e.g., industry) identified and addressed in lending structures. Furthermore, there is meaningful variation even across deal structures focused on the same asset base. It is therefore critical to understand the segment broadly and have specific knowledge of trends and subtle differences that exist across transactions to more accurately calibrate risk and return. This benefits platforms with history and the depth of experience in ABF.
- Due diligence and monitoring – As performance can vary significantly between two similar-looking portfolios, we believe that successful investing requires thorough due diligence in evaluating asset bases, management team experience, underwriting, operations and other important underlying factors. This process should include ongoing monitoring of the investment with the capability to conduct cash flow and operational audits in-house.
- Consistent and constant supply – An investor’s own track record and reputation is crucial, assuring borrowers of certainty of execution and resulting in an ongoing supply of compelling assets and opportunities. Having the ability to source assets on a bilateral basis, as well as through brokered/syndicated channels, can ensure that the deal funnel remains wide and primed for opportunity. Relative value can be sought across all channels and is subject to fluid market dynamics.
The ABF market is experiencing multifaceted growth. Transaction volumes are surging, accompanied by ongoing refinements in deal structures. While certain market segments have established rating methodologies and comprehensive default histories, others are in earlier stages of development, with shorter track records for predicting future default rates. This dynamic landscape presents both opportunities and challenges for investors.
The market's rapid transformation is driven by a combination of cyclical and structural factors. Some growth catalysts are tied to current economic conditions and may fluctuate over time. However, fundamental motivations – such as enhanced capital efficiency, improved returns and accretive financing for new investments – are likely to sustain the long-term expansion of ABF strategies.
To navigate this complex environment successfully, investors must develop a nuanced understanding of the market's current state and the forces shaping its future. This includes staying abreast of evolving deal terms, emerging asset classes and the varying levels of risk and transparency across different ABF segments. By combining thorough analysis with strategic foresight, investors can capitalize on the opportunities presented by this growing and increasingly sophisticated market.
Sources: Private Placement Monitor, Bloomberg, 2025.
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