Know what you own

November 4, 2025

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In-depth knowledge of underlying holdings is key to riding out periods of uncertainty and volatility, argue Tatjana Greil-Castro, Kirsten Bode and our team of public and private market investment professionals.

Recent headlines have highlighted growing unease as investors assess the state of global markets. Elevated equity valuations,¹ surging precious metals,² AI-driven exuberance³ and a rise in bankruptcies among subprime lenders and auto parts suppliers⁴ have fuelled debate over whether we are nearing an inflection point.

The lending landscape also looks markedly different from the pre-GFC era, with private credit now a powerful force in capital markets. Meanwhile, persistent macroeconomic and geopolitical uncertainty continues to drive volatility and blur traditional market signals.

In an environment where markets often appear fixated on “faster, higher, bigger,” it’s easy for investors to lose perspective. Yet one principle stands out above all: investors must know what they own. Understanding the underlying assets in a portfolio is crucial for navigating uncertainty, avoiding pitfalls and responding effectively to changing market conditions.

In credit markets, this means carrying out disciplined, fundamental analysis consistently - through both periods of sanguinity and stress - so portfolios are built to withstand turbulence. When the credit work is done properly, investors don’t need to pull back at the first sign of weakness. A strong, resilient portfolio provides the confidence to stay invested, because it is time in the market, not timing the market, that drives long-term success.

The resilience of public credit markets

Our broad assessment of global credit markets is that they remain fundamentally resilient, underpinned by solid corporate balance sheets and a generally favourable macroeconomic environment. US and European investment-grade spreads are near multi-decade lows,⁵ reflecting healthy issuer fundamentals and sustained investor confidence.

Corporate earnings continue to demonstrate strength, with roughly 80% of companies surpassing expectations last quarter⁶ - a trend likely to persist given ongoing profitability and disciplined cost management. Although capital expenditure plans, particularly in technology and AI, are significant, we believe these investments appear well-financed, and we believe do not pose near-term systemic risks.

Valuations across credit markets are undeniably rich,⁷ but dispersion across maturities, sectors, and regions continues to create selective opportunities. For active managers focused on fundamentals, this environment offers the potential to capture relative value, particularly where market pricing fails to reflect underlying credit quality.

The monetary policy backdrop is also helpful: in Europe, rate cuts have reduced corporate borrowing costs and default risk while increasing demand for credit. In the US the expected easing cycle should encourage renewed flows into USD-denominated bonds as hedging costs decline and relative yields become more attractive.

Investment-grade credit remains supported by robust earnings and conservative leverage. The combination of sound liquidity positions and an increasingly accommodative policy environment continues to reinforce market stability.

Nevertheless, with spreads compressed near historic lows – a situation which expect to continue, investors should remain highly selective, prioritizing issuers with durable cash flows, prudent financial management and limited refinancing risk and ensure they are being adequately compensated for the risks they take.

In the leveraged finance segment, fundamentals are similarly constructive. Distress and default rates remain subdued,⁸ while loan market deterioration - though modestly higher - is far below the levels experienced in 2015, 2019, or 2022.⁹ 

Importantly, the supply of lower-rated debt has contracted: CCC and B3 issuance sits at historic lows, reflecting tighter lending standards and greater scrutiny since the 2021 peak in risk-taking.¹⁰ Corporate earnings strength is another key pillar of support. In the US, high-yield issuers are operating with average profit margins around 14%,¹¹ providing a substantial buffer against potential tariff, or macro-driven, shocks.

In Europe, high-yield credit benefits from a strong technical while offering greater dispersion across issuers, creating fertile ground for active credit selection. In contrast, US high yield remains defined by earnings resilience, moderate leverage and limited refinancing pressures. Fiscal policy may provide additional tailwinds: measures such as tax relief and accelerated depreciation under the recently enacted “Big Beautiful Bill” should further strengthen corporate credit metrics, while tariff effects have thus far been well contained.¹²

Overall, we believe the leveraged finance market presents a picture of broad stability. Areas of weakness tend to be idiosyncratic rather than systemic, often linked to specific governance or operational challenges rather than broader deterioration in credit quality.

Recent corporate failures - most notably First Brands and Tricolor - have attracted attention but ultimately underscore the importance of due diligence rather than indicating structural stress. Both cases stemmed from company-specific governance and fraud issues. Crucially, they posed minimal contagion risk: Tricolor’s securitizations were not held in CLOs, and the overall exposure within leveraged finance markets was negligible.

CLO markets themselves also remain a source of strength. Spreads have largely normalized, and performance across rated tranches continues to exceed that of comparable corporate bonds.¹³ Issuance activity is meanwhile dominated by resets, highlighting that investors are primarily focused on maintaining and optimizing existing structures rather than expanding risk exposure. The inherent diversification within CLO portfolios further mitigates contagion risks, while strong collateral performance and active management have supported returns.

References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

Financials – underpinned by regulatory enhancements

We believe banks also continue to demonstrate resilience, with solid asset quality supported by strong earnings, low charge-offs and stable non-performing assets.¹⁴ In the US, economic growth above 3%¹⁵ is underpinning credit quality across the sector. From a relative value perspective, senior bank bonds now offer total return potential comparable to Tier 2s, driven by roll-down effects on steeper yield curves - allowing investors to de-risk without meaningfully sacrificing returns.

Since the Global Financial Crisis, banks have strengthened balance sheets through tighter regulation and higher capital ratios,¹⁶ leaving the sector well positioned for potential headwinds.

Meanwhile, the evolving relationship between banks and private credit funds is reshaping corporate lending and supporting long-term market stability. As Basel IV raises equity requirements,¹⁷ banks may respond by raising capital or trimming balance sheets - widening the financing gap and fuelling demand for private credit.

Credit-risk transfer (CRT) structures further enhance this dynamic, freeing bank capital and reducing exposure to highly leveraged borrowers. Together, these trends should reinforce the long-term sustainability of the credit ecosystem.

Private credit - a maturing asset class built on strong foundations

Today’s private debt market is very different to that pre GFC. It can broadly be broken down into sub-asset classes covering direct lending to the large cap, mid and lower mid markets, rescue or capital solutions lending, asset-backed (e.g. aviation finance) and parallel (co) lending alongside banks.

Our experience in Europe is in the lower middle market, an area we believe to be structurally sound. Most funds are equity-financed with limited leverage,¹⁸ mitigating systemic and maturity-mismatch risks that can affect the banking sector.

Conservative underwriting and the predominance of senior secured lending have kept default and recovery rates within long-term averages.¹⁹ The asset class also continues to display low correlation with both public credit and private equity, offering consistent contractual cash flows and limited mark-to-market volatility.

Where pressures have emerged, they tend to be idiosyncratic rather than systemic and stem from industry-specific shifts, increased competition, or evolving business models rather than any cyclical deterioration in credit quality.

It’s also important to consider the evolutionary phase of the European private debt market compared to its US counterpart, given the former is still in a different evolutionary journey of growth and evolution born out of the Global Financial Crisis.

As such, we believe the increasing visibility of any credit events today is largely a function of that maturation rather than structural fragility.

In our view, the lower mid-market continues to offer particularly attractive opportunities. Here, margins have held steady, supported by strong covenant protection, disciplined underwriting and proprietary deal flow. Defaults remain contained, and historical returns of around 10% with volatility near 5%²⁰ continue to compare favourably to other private and public credit segments - offering equity-like returns with investment-grade-like risk characteristics. The illiquidity premium in private credit also remains resilient at around its long-term average of 4%.²¹

Parallel lending, where an asset manager works in partnership with a bank on all loans, offers a greater structurally conservative profile - typically around 3x leverage²² - with first-lien exposure shared pari passu with banks. This model embeds alignment between banks and asset managers, benefits from Basel-compliant credit standards and, in our view, shows no evidence of spread compression or overheating.

Navigating credit with discipline and experience

A disciplined, fundamentals-based approach remains essential in today’s credit markets. Rigorous bottom-up analysis – focused on business quality, cash flow resilience, liquidity, leverage and governance – forms the foundation of sound portfolio construction. Only issuers meeting stringent credit criteria merit inclusion, and ongoing monitoring ensures exposures remain aligned with evolving risk parameters and return objectives.

Active management continues to provide a critical advantage in navigating complex, late-cycle conditions. A deep understanding of underlying assets enables managers to anticipate risks, identify valuation inefficiencies and adjust exposures proactively. Structured portfolio construction, diversification and scenario analysis further strengthen resilience, allowing portfolios to withstand volatility while remaining positioned to capture selective opportunities.

In public credit markets, fundamentals are broadly supportive. Corporate balance sheets remain strong and underwriting standards prudent, though elevated valuations underscore the need for discipline and precision in credit selection. In private credit, structural trends are creating a sustained opportunity set. Tighter bank lending standards and the capital requirements introduced under Basel IV are encouraging greater reliance on private lenders able to provide flexible, relationship-driven capital solutions.

In private markets, the ability to react is unique, due to sole-lender status and better/more direct access to information. However, while disciplined analysis can mitigate many risks, not every risk can be foreseen or fully captured in advance. Outlier events emerge unexpectedly and can test even the most robust frameworks. The key is to remain vigilant, maintain transparency in portfolio holdings and ensure positions are grounded in a clear understanding of their fundamental risk and return drivers.

The credit market has historically delivered positive returns around 81% of the time,²³ making short-term moves in and out rarely profitable. That’s why our focus remains on resilience, consistency and deep credit understanding - the foundations of enduring performance across cycles. By knowing what we own and maintaining discipline through calm and storm, we are better positioned to navigate volatility and deliver sustainable outcomes for our investors.

Across both public and private markets, the principle remains unchanged: knowing what you own, managing it actively and having the confidence to stay invested, is the cornerstone of durable, risk-adjusted performance, even when the unexpected occurs.

References

1. Bloomberg, as of 29th September 2025. “Wall street warns to a new normal of sky-high equity valuations”
2. BBC News, as of 8th October 2025. “Gold surges past US$4000 an ounce as uncertainty fuels rally”
3. The Guardian, as of 29th October 2025. “Nvidia becomes world’s first US$5trn company amid stock market and AI boom.”
4. Reuters, as of 14th October, 2025. “First Brands, Tricolor collapse raise fears of credit stress, with Dimon warning of ‘more cockcroaches’”
5. ICE Index Platform, as of 30th October 2025. ICE BofA US Corporate Index (C0A0), ICE BofA Euro Corporate Index (ER00).
6. Factset, as of 28th August 2025. Earnings insight infographic. Q2 2025 by the numbers
7. ICE Index Platform, as of 30th October 2025. ICE BofA US Corporate Index (C0A0), ICE BofA Euro Corporate Index (ER00), ICE BofA Euro High Yield Index (HE00), ICE BofA BB-B US Non-Financial Cash Pay High Yield Constrained Index (HC4N).
8. JP Morgan US Fixed Income Markets Weekly, as of 17th October 2025. 1.4% default YTD for USHY with FY forecast of 1.5%.
9. Moody’s Investors Service, as of August 31st, 2025. Latest available data used.
10. JP Morgan, as of 3rd October 2025, Credit Strategy Weekly Update, high yield and leveraged loan research
11. JP Morgan, as of 3rd October 2025, Credit Strategy Weekly Update, high yield and leveraged loan
12. Reuters, as of 13th August, 2025. How the US is eating Trump’s tariffs.
13. S&P/LSTA Leveraged Loan Index (CLO subset), as of 30th October 2025.
14. Morningstar, as of 16th October 2025. “Key takeaways for investors from big bank Q3 earnings”
15. US Bureau of Economic Analysis ,as of 29th September 2025
16. European Central Bank, Banking Supervision, as of 11th June 2025. Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, Goldman Sachs European Financials Conference 2025
17. Bank of International Settlements, as of 3rd October 2025. Basel Committee reports further progress on Basel III implementation.
18. European Central Bank, Banking Supervision, as of 3rd June 2025. Hidden leverage and blind spots: addressing banks’ exposures to private market funds
19. Source: Morgan Stanley Investment Management, as of 3rd October 2025. “Understanding private credit’s rapid growth”
20. Cliffwater Direct Lending Index Performance (LTM), 2006-Q1 2025.
21. Cliffwater Direct Lending Index, as of 31st March 2025. Latest available data used
22. Muzinich & Co, as of 30th October. Calculated based on our internal estimate at the end of investment period of our parallel lending strategy.
23. ICE Index Platform, as of 31st December 2024. ICE BofA Global Corporate & High Yield Index (GI00). Data updated annually.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of November 2025 and may change without notice.

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Index descriptions

J0A0 - The ICE BofA US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

GI00 – The ICE BofA  Global Corporate & High Yield Index tracks the performance of investment grade and below investment grade corporate debt publicly issued in the major domestic and eurobond markets. Qualifying securities must be rated by either Moody’s, S&P or Fitch, have at least one year remaining term to final maturity, at least 18 months to maturity at point of issuance and a fixed coupon schedule.

ER00 – The ICE BofA Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million. 

C0A0 - ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million. Original issue zero coupon bonds, 144a securities (with and without registration rights), and pay-in-kind securities (including toggle notes) are included in the index. Callable perpetual securities are included provided they are at least one year from the first call date. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities where conversion can be mandated by a regulatory authority, but which have no specified trigger, are included. Other hybrid capital securities, such as those issues that potentially convert into preference shares, those with both cumulative and non-cumulative coupon deferral provisions, and those with alternative coupon satisfaction mechanisms, are also included in the index. Equity-linked securities, securities in legal default, hybrid securitized corporates, eurodollar bonds (USD securities not issued in the US domestic market), taxable and tax-exempt US municipal securities and DRD-eligible securities are excluded from the index.

FXHCEUUS Index -Bloomberg EURUSD 3 Month Hedging Cost shows the three-month euro hedge cost for dollar-based investors on an annualised basis. This is based on the assumption the investors sell dollars to buy euros in the spot market and simultaneously sell euros in the forward market to buy back dollars.

EUORDEPO Index – The deposit rate is the interest rate paid on the surplus liquidity that credit institutional may deposit overnight in an account with a national central bank that is part of the Eurosystem. Such deposits are remunerated at a pre-specified interest rate.

FDTR – Data is the short-term interest rate targeted by the Federal Reserve’s Federal Open Market Committee (FOMC) as part of its monetary policy.

CDLI - The Cliffwater Direct Lending Index is a benchmark that measures the unlevered, gross-of-fee performance of U.S. middle-market corporate loans. It is an asset-weighted index that represents the performance of underlying assets from eligible Business Development Companies (BDCs) and was the first to track the direct lending market. The CDLI aims to provide investors with a more transparent and representative view of the direct lending asset class by avoiding typical private market biases like survivorship and self-selection.

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

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This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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