Fitch predicts challenges for US CLOs amidst global economic downturn

December 20, 2023 (MLN): The global macroeconomic slowdown will be a headwind for U.S. collateralized loan obligations (CLOs) in 2024, given the outlook for various corporate sectors, says Fitch Ratings.

Profit growth is falling, and high-interest rates are likely to continue to constrain deal-making activity as capital markets remain tight.

Fitch’s U.S. economic forecast published December 2023 incorporates a slowdown in growth to 1.2% in 2024 as household income and profits decelerate, credit and investment weaken, and real interest rates rise.

Fitch currently expects the U.S. Federal Reserve to take the funds rate to 4.75 at the end of 2024, 75 basis points below year-end 2023 levels.

The mix of outlooks for corporate CLO sectors is 72% neutral, 20% deteriorating, and 8% improving.

Key watch items for 2024 include the effect of macroeconomic conditions and interest rates on corporates’ performance, elevated default rates, and the ability of issuers to obtain liquidity and address maturities under tight capital market conditions.

However, as highlighted in Fitch’s recently published U.S. Leveraged Finance Outlook 2024, our 2024 outlook for U.S. Leveraged Finance is deteriorating on the back of sustained tighter access to capital markets and higher for longer interest rates pressuring highly levered issuers. Fitch projects the loan default rate will be 3.5%–4%.

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