Two high-profile bankruptcy filings by leveraged US borrowers—both of which face allegations of fraud—have reverberated across financial markets and raised questions about the stability of alternative credit. When considering the implications of these bankruptcies for lenders and investors, we believe it’s important to understand the instruments involved.

The headline-grabbing troubles of Tricolor Auto Group and First Brands Group, for example, primarily impacted broadly syndicated loans and other more esoteric forms of credit. Syndicated loans—also referred to as bank loans, leveraged loans, tradeable credit and other terms—are extensions of credit to noninvestment grade borrowers that are arranged and administered by large banks, who solicit participation in the deals by institutional investors like mutual funds and collateralized loan obligations (CLOs).

Given that the institutions participating in these syndications are not negotiating the terms of the deal, gaining access to information that supports due diligence efforts can be a challenge; many leveraged borrowers are private companies with limited public disclosures, and direct engagement with borrower management teams is often not available. Moreover, competitive dynamics in recent years have eroded the structuring power of syndicated lenders, resulting in an increasingly “covenant lite” market. In their efforts to offset these limitations, institutional investors generally construct broadly diversified loan portfolios.

The nature of the direct lending relationship generally enables lenders to apply more rigorous underwriting discipline, ensure greater protections in loan terms and act more proactively when signs of stress emerge. As a result, direct lending historically has experienced lower default rates and higher recovery rates than syndicated loans.¹

An interesting feature of the financial markets over the past several quarters has been the concurrent rally in equities and gold prices. Gold’s year-to-date gain of more than 50%—even after this week’s volatility—puts it on an annual pace not seen in nearly 50 years, as central banks and investors alike have piled into the metal amid elevated risks and the potential for currency debasement. More recently, we’ve also seen other precious metals—including silver and platinum—break out to the upside.¹

Historically, equities and gold have both participated in the nominal drift of the global economy, but they typically have done so in a countercyclical manner, as gold has tended to thrive in conditions less supportive of equity investment.

One notable exception was the early 1970s, a period characterized by the fiscal pressures of the Vietnam War, the end of the Bretton Woods gold peg and executive branch pressure on the Fed to ease interest rates despite inflation pressures. Together, these factors contributed to monetary disequilibrium and ultimately a decade of stagflation.