Performing Credit Quarterly 3Q2024: Who Are the Lenders Now?

Summary

• The U.S. Federal Reserve cut interest rates by 50 basis points in September 2024, ending the hiking cycle that began in March 2022.
• Asset-backed finance (ABF) faces a potential financing void as banks retreat due to regulatory headwinds & deposit instability.
• Basel III endgame rules require large U.S. banks to hold more capital, with unrated ABF assets facing a 100% risk weighting.
• Banks are prioritizing lending to their largest clients or activities that generate fees & deposits, causing bank lending as a percentage of U.S. GDP to drop nearly ten percentage points since the Global Financial Crisis.
• Private credit currently provides less than 5% of asset-backed financing within the $5.5 trillion universe due to high barriers to entry.
• The core ABF segment between senior investment grade lending & opportunistic risk is identified as the most underserved portion of the market.
• Aircraft leasing presents a financing opportunity due to supply constraints from manufacturers like Boeing & Airbus, with deliveries expected to remain below 2017 levels through 2030.
• Synthetic risk transfer (SRT) issuance in the U.S. is projected to grow fourfold in 2024 as banks seek to manage balance sheet risks.
• The unsecured consumer credit sector saw performance shocks in 2022-2023, leading to tighter underwriting standards & higher interest rates.
• Loans originated through personal interaction in the consumer sector performed better than those originated online or without personal interaction.
• Senior loan & high yield bond issuance reached over $140 billion in September 2024, representing a 70% increase from the same period in 2023.
• Total nonfarm payroll employment increased by more than 250,000 jobs in September 2024, exceeding the consensus expectation of roughly 140,000 jobs.
• Treasury yields rose following strong jobs data, creating uncertainty regarding the future trajectory of interest rates.