In its latest report, BSP-Alcentra looks at key trends and what lies ahead for 2025.

Global High Yield: Supportive fundamentals and default outlook should bolster coupon-like returns

Global Developed High Yields (HY) recorded a solid 2024, driven by supportive corporate fundamentals (low defaults and robust supply/demand dynamics). European HY returns slightly edged out US HY, helped by stronger spread compression across European credit quality.

In 2025, we anticipate a positive year with coupon-like returns. Developed market defaults should remain comfortably below long-term averages given firm fundamentals and a supportive macro-economic environment in the United States and likely supportive ECB policies. We anticipate benefits from renewed capital market activity (increased M&A issuance). The developed markets’ underlying credit quality and composition continues to remain firm, evident by elevated exposure in higher-rated and secured debt.

Global Structured Credit: Elevated carry set to continue driving record CLO supply

2024 delivered strong CLO performance driven by solid technicals, high carry and supportive credit fundamentals. CLOs globally experienced record gross supply. Despite this, US AAA supply was negative due to elevated levels of amortising / redeeming CLOs. This combined with strong demand from US/Asia banks drove US AAA spreads tighter which is a dynamic we expect to continue into 2025. Conversely, Europe experienced much higher net AAA supply against a backdrop of weaker demand.

Credit spreads encroached on record tights, but CLOs lagged and notably have more room to tighten, especially in Europe. EUR AAs and Single-Bs remain our top value picks into 2025. As 2025 looks likely to be another record-breaking gross supply year, the CLO manager base continues to grow, and US rates likely to be higher for longer, we expect continued demand for floating rate CLO tranches.

We expect credit fundamentals for loans to continue to be softer in the US vs EU. Higher US rates will likely put pressure on the free cash flow of underperforming borrowers. Whilst we expect muted macro growth in Europe, expected rate cuts will result in fewer credit issues, but the default rate will rise from the current low run-rate. Despite the strong demand, record supply and rising defaults could lead to pockets of volatility in 2025. Tail risk in the loan markets remains and will continue to drive dispersion, more so in the US vs EU.

Global Multi-Asset Credit: Evolving central banks and fiscal policies offer compelling value creation

Sub-investment credit markets generated strong returns in 2024 though global high yield and loans pathways were less linear given evolving technicals and differing central bank policies. For multi-credit mandates, this environment was ripe for stronger returns.

To begin 2025, we continue to favour floating rate global bank loans for the incremental yield and spread advantage relative to fixed HY. Global HY should generate coupon-like returns in 2025.

We also remain positive on alternatives, particularly toward CLOs.

Global trade wars potential, resultant inflation pressure and global central bank divergence are some 2025 challenges. We remain vigilant on security selection, focused on issuers with defensive cashflows, strong margins and less sensitivity toward tariff impacts. Given strong technical alongside stable underlying fundamentals (positive earnings and a modest default outlook), we see multi-credit funds generating solid returns driven by income and boosted by tactical allocation within liquids and alternatives.

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