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Having delivered impressive 2023 returns of c. 13.2%,1 outperforming other fixed income counterparts with less volatility, European loans have carried that strong performance into 2024, returning c. 2.4%2 in the first quarter. This compares to first quarter returns of c. 2.2%3 and c. 1.7%4 for US loans (EUR hedged) and European high yield, respectively. Supportive technical dynamics and robust issuer fundamentals continue to drive these superior returns. At just 1.1%5 in 2023, defaults remain low relative to historical levels. We believe defaults will be low in 2024 and remain well below historical averages.

This whitepaper provides insight into why floating-rate assets like the European loan market have outperformed, even in the current interest-rate environment. We look at:

  • What’s behind the supportive technical dynamic?
  • How are issuer fundamentals looking across Europe?
  • What is the outlook for defaults for the remainder of 2024?
  • How do European loans compare from a relative value perspective to other fixed income asset classes, including European high yield?

As the European loan market has a more defensive sector profile, we would expect the loan market to continue to outperform. Alcentra has one of the largest and most experienced platforms in the European loan market and we believe an allocation to European loans is still very attractive, even within a declining interest-rate environment.

Endnotes

  1. Source: Credit Suisse Western European Leveraged Loan Index excluding USD, hedged to EUR. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
  2. Ibid.
  3. Source: Credit Suisse Leveraged Loan Index, hedged to EUR. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
  4. Source: ICE BofA European Currency High Yield Index. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
  5. Source: Credit Suisse Western European Leveraged Loan Index. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

 

WHAT ARE THE RISKS?

All investments involve risks, including the possible loss of principal. 

Fixed income securities involve credit, inflation and reinvestment risks, and possible loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

Floating-rate loans and debt securities are typically rated below investment grade and can be subject to greater risk of default.

Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Diversification does not guarantee a profit or protect against a loss.

Past performance does not guarantee future results.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. All investments involve risks, including possible loss of principal. There is no guarantee that a strategy will meet its objective. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where a strategy invests in emerging markets, the risks can be greater than in developed markets. Where a strategy invests in derivative instruments, this entails specific risks that may increase the risk profile of the strategy. Where a strategy invests in a specific sector or geographical area, the returns may be more volatile than a more diversified strategy.

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