The Roundup: Top Takeaways from Oaktree’s Quarterly Letters – December 2025 Edition

Summary

• Howard Marks states recent credit episodes are systematic behavioral phenomena rather than systemic failures of the financial system.
• Investors tend to lower standards & bid aggressively during prolonged good times, leading to imprudent loans & frauds that occur in clusters.
• Recent credit events have likely chastened lenders, prompting a re-elevated level of prudence in future decisions.
• Large-cap sponsors increasingly finance deals in the broadly syndicated loan market, with 63% of LBOs over $1 billion using this channel in 2025 compared to 51% in 2024.
• Middle-market deal flow has increased after a lull in the first quarter of 2025, though pricing remains tight due to high supply of dry powder.
• Average spreads in middle-market deals have fallen to 450-475 bps over SOFR, resulting in lower prospective risk-adjusted returns than a year ago.
• European private credit is in early stages with significant growth potential as banks remain overly reliant on lending, constituting over 75% of GDP.
• European banks face regulatory capital constraints that push borrowers toward alternative lenders while exceptional PE dry powder creates a financing gap.
• Government expenditure in Europe is set to increase, focusing on military & industrial bases to provide a stimulative tailwind to the economy.
• Success in European direct lending requires rigorous risk control, experience across market cycles, & localized sourcing networks.
• Over 55% of the U.S. high yield bond market is rated BB, a record level that is 10 percentage points higher than a decade ago.
• Bonds rated CCC & below constitute 12.1% of the high yield market, below the long-term average of 17.2%.
• The high yield bond default rate stands at 1.8%, lower than the post-GFC average of 2.5%.
• Barclays anticipates $70-90 billion of fallen angels in 2026, which may swell the BB-rated portion of the high yield market.
• Emerging markets equities outperformed developed markets for three consecutive quarters, a trend not seen since 2017.
• EM commodity producers benefit from high demand for precious & industrial metals, with gold prices reaching record levels.
• The U.S. dollar weakened by nearly 10% in the first three quarters of 2025, benefiting EM issuers with USD-denominated bonds.
• China was the best-performing large EM market in the third quarter, driven by optimism on trade relations, policy measures, & AI enthusiasm.
• Chinese equities trade at roughly 12.7x forward earnings & 1.7x book value, remaining discounted compared to the broader EM index.
• The EM equities index trades at 1.9x book value & 14.0x consensus forward estimated earnings, both lower than U.S. & developed market levels.