Historically, the income and total returns on European broadly syndicated loans have been comfortably exceeding realized default losses. This trend is evident from the chart with incomes, comprising of interest and fees, exceeding 4% and realized losses well below 1%. Total returns with mark-to-market component have also remained strong with the exception of 2022 market selloff.
The rising interest rates have been fueling strong 2023 returns, with income of 10+% still providing substantial buffer against prospect of rising defaults. As the attractive market yields pose challenging financing conditions for borrowers, investment strategies backed by thorough credit analysis are best positioned to outperform. The new paradigm of high rates more than ever favors active investment approach, which allocates to borrowers with strong financials and business models, while avoiding weakening segments of the market. Such weak loan market segments include not just borrowers facing outright defaults, but also underperformers at risk of rating downgrades triggering selloffs.