Goldman: 'potential downside risks for oating rate borrowers in the leveraged nance universe'.

The analyst comments "The rise in global bond yields and recent central bank rate hikes have renewed credit investors’ focus on the interest rates backdrop—specifically on the potential downside risks for floating rate borrowers in the leveraged finance universe. ● There are two key channels of fundamental impact for this cohort, in our view. First and foremost is on the debt service cost, as floating rate borrowers will experience a headwind in the form of higher interest costs immediately, while the fixed rate borrowers will experience higher interest costs only if/when they refinance their lower-coupon debt. ● The fundamental credit metric improvements visible over the past several quarters are likely to stall somewhat from here, in our view. Higher base rates are an especially unwelcome development for issuers aiming to refinance upcoming Software loan maturities. ● Second is the impact on specific business models where financing is a key ingredient to purchases, such as real estate, autos, and areas of home improvement. More likely than broad-based disruption, however, we expect increased dispersion depending on the customer and category end-market focus in interest sensitive sectors. ● Given the solid state of the economy and the relatively contained amount of rate hikes expected by our economists, we view the fundamental headwind as largely manageable for leveraged finance borrowers and unlikely to spark a meaningful rise in defaults above our current forecasts. ● Moreover, and as has been the case historically, the drivers of rate increases are far more important than the absolute levels. Increasing interest rates reflecting resilient growth are more easily digested by credit fundamentals. ● Higher base rates may support increased demand for floating rate credit, such as direct lending loans (within private credit) or broadly syndicated loans (either outright or as part of structured investments). That said, it is unlikely to be the key driver of investor demand, in our view, and will need to be accompanied by a supportive macroeconomic backdrop and compelling relative value within the asset class."