Credit Outlook.pdf

Key points from the Apollo Global Management credit market outlook as of October 2023:

1. Default rates are rising: A default cycle has started, with bankruptcy filings increasing, particularly affecting middle market companies.
2. Credit spreads remain tight: Despite rising default rates, credit spreads are still relatively narrow.
3. Higher debt costs: The Fed's decision to keep rates higher for longer will continue to weigh on earnings and interest coverage ratios for both investment-grade (IG) and high-yield (HY) companies.
4. Refinancing costs will increase: Both IG and HY companies will face higher refinancing costs.
5. Lend to firms with low leverage and high interest coverage ratios: Investors should focus on lending to companies with strong balance sheets to mitigate risks.
6. Consumer credit growth is slowing: Lagged effects of monetary policy are slowing consumer credit growth, with auto and credit card delinquencies rising and bank lending conditions tightening.
7. Interest coverage ratios are declining: Both IG and HY interest coverage ratios are coming down, indicating potential stress in the credit market.
8. Bonds are more attractive than equities: The yield difference between BBB corporate bonds and S&P 500 earnings yield suggests that bonds are currently more attractive than equities.

Overall, the credit market outlook is cautious, with rising default rates and higher debt costs expected to continue in the coming quarters. Investors should prioritize lending to companies with strong balance sheets and consider the relative attractiveness of bonds versus equities.