2022 Bank Loans Outlook: Views on Demand, Defaults and Transitioning to SOFR
1) Leveraged loan supply and demand experienced a banner year in 2021. Syndication of M&A-driven loans and CLO issuance shattered records.[i] In the wake of such a remarkable year, investor focus has turned to the broader issue of inflation. How it could impact demand in the loan market?
Looking at our portfolios, we see a lot of companies that permanently reduced costs during the pandemic and are showing pricing power. That combination should help them bolster results against cost inflation in 2022. However, as inflation has increased across the economy, the Federal Reserve is likely to raise rates in order to control it. This could be a benefit to the loan market. Loan coupons float alongside rate increases, which tends to spur new demand for leveraged loans and keeps their prices near par. On the demand side, we believe that CLOs and retail mutual funds will be strong buyers of loans again this year.
2) What is your outlook for defaults in 2022?
The environment for loan credit quality remains very constructive. As always, our credit selection remains focused on long-term risks, not short-term movements. We agree with the market expectation that default rates are likely to be very low over the next year due to both company-specific circumstances (healthy liquidity, cost cutting and revenue retention) and macroeconomic support in the form of fiscal and monetary stimulus. We believe companies in the loan market are well positioned to survive any likely increases in interest rates. With few maturities scheduled in the coming years, defaults are projected to be quite low.
3) How is the loan market handling the transition from London Inter-Bank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR)?