The BofA Securities report titled "Collateral Thinking Year Ahead 2024: Goldilocks and the Three Bears" presents key macro assumptions for credit investors in 2023. The report highlights that goldilocks conditions for credit investors were presented by corporations' increasing input costs, high cash balances, and pricing power, which offset deteriorating leverage fundamentals. Loan investors benefited from 2x coupons without crippling issuer liquidity, leading to loan outperformance across credit. However, in 2024, this credit goldilocks will be challenged by three bears: rates (increasing costs), earnings (decreasing coverage), and issuance (softening technicals). The report expects market volatility on gyrating consensus views, with a base case of a soft-landing with rate cuts. Higher for longer rate backdrop will encourage value transfer from equity to debt, and dispersion across corporates will increase, leading to loan issuance and restructurings. The report also expects leverage coverage ratios to decline, reaching 2.3x in loans, 2.1x in private debt, and 4x in HY bonds. Loan maturity walls are elevated, and HY walls are at record levels, which will drive increased issuance and restructurings. The report expects leverage defaults to finish in the 3-5% range. The US Loans Corp fundamentals are likely to decline despite rate cuts, impacting loan performance.
