Structural Opportunities in Private Credit Amid Trade Tensions and Elevated Rates

The confluence of prolonged elevated interest rates, geopolitical trade tensions, and a shifting economic landscape has created a unique moment for private credit investors. In this environment, structured products like CLOs, CMBS, and stressed debt—cornerstones of Oaktree Capital's strategy—are emerging as prime vehicles for capital preservation and growth. By focusing on sectors with yield disparities, low default dynamics, and strategic structural advantages, investors can navigate risks while capitalizing on valuation mismatches.

The Macro Backdrop: Fed Rates, Trade Wars, and Credit Opportunities

The Federal Reserve's reluctance to cut rates despite slowing GDP growth has kept borrowing costs elevated, pressuring borrowers in cyclical industries. Meanwhile, trade policies under the new administration—such as tariffs on key commodities—have introduced inflationary pressures and supply chain disruptions. These twin headwinds have amplified volatility in public markets but have also created “picks-and-shovels” opportunities in private credit: sectors that thrive by addressing the structural needs of borrowers and investors alike.

CLOs: Tight Spreads, Structural Flexibility, and Equity Optionality

Collateralized Loan Obligations (CLOs) have become a pillar of private credit demand. Despite record issuance in 2024, CLO equity tranches continue to offer 10–15% annualized returns, driven by a robust reset/refinance cycle and tight liability spreads. The equity arbitrage—the gap between loan asset yields and CLO debt costs—remains attractive compared to historical averages, even as spreads narrow.

Key dynamics:
- Liability Costs Lock-In: CLO managers are issuing deals with longer non-call periods, insulating against rising rates while capitalizing on refinancing opportunities.
- Sector Diversification: Focus on loans to companies in industrials, healthcare, and technology—sectors less exposed to trade wars—has kept defaults low (3.9% as of Q1 2025).
- ETF Momentum: The $20 billion surge in CLO ETF assets since 2023 has broadened liquidity, making CLO debt tranches more accessible to retail investors.

Oaktree's emphasis on selective equity allocations in refinance-driven CLOs aligns with this strategy. As Panossian notes, “The best opportunities lie in deals where cash flows are stable, but spreads have compressed due to indiscriminate buying—a classic value mispricing.”

CMBS: Sector-Specific Risks, But Value in Industrial and Multifamily

Commercial Mortgage-Backed Securities (CMBS) face headwinds from widening spreads, particularly in office and retail sectors. Q2 data shows BBB- spreads at 475 bps, up 105 bps year-on-year, reflecting investor skepticism about office demand and mall viability. However, industrial and multifamily transactions—backed by stable cash flows and supply shortages—offer compelling yields with lower default risks.

Strategic allocation points:
- Special Servicing Opportunities: Deals in SASB transactions with strong cash flows but discounted prices due to special servicing risks present distressed value plays.
- Agency vs. Private Label: Agency CMBS, backed by Ginnie Mae, offer lower volatility but narrower spreads. Private-label CMBS with industrial exposure (e.g., warehouses, data centers) balance yield and safety.

Stressed Debt: Niche Opportunities Amid Elevated Default Risks

The B3/CCC-rated debt segment is a high-risk/high-reward arena. While default rates remain low (under 5% in non-cyclical sectors), geopolitical shocks—such as sudden tariff hikes—can destabilize borrowers reliant on global supply chains.

Panossian's “valuation mismatch” thesis applies here:
- Real Estate-Backed Debt: Selective exposure to parking garages, self-storage, or suburban retail with hard assets provides collateral overhangs even in downturns.
- Avoid Commodity-Linked Loans: Firms tied to tariffs-prone sectors (e.g., automotive, energy) face higher refinancing risks.

The Oaktree Playbook: Selectivity and Structural Advantages

Oaktree's success in private credit hinges on three pillars:
1. Structural Optionality: Focus on assets with refinance/reset options (e.g., CLO equity, CMBS with upcoming maturity cliffs).
2. Sector Agnosticism: Allocate to industries insulated from trade wars, such as healthcare IT or logistics, while avoiding cyclical sectors like office real estate.
3. Active Management: Use distressed debt expertise to exploit special servicing situations where pricing discounts exceed risk premiums.

Investment Strategy for 2025–2026

• CLO Debt Tranches (AAA/Aa): For yield-starved investors, these offer 3–5% spreads over Treasuries with minimal default risk.
• CMBS Industrial/Specialty: Target BBB-rated deals with 10+ year durations and underwritten DSC ratios >1.3x.
• Stressed Debt (Real Estate-Focused): Use dedicated funds to buy CMBS equity or mezzanine tranches at 50–70 cents on the dollar, backed by hard assets.

Risks and Mitigations

• Trade Policy Uncertainty: Monitor tariff schedules and allocate to sectors with domestic supply chains.
• Fed Rate Cuts: If the Fed relents, refinancing booms could compress spreads—lock in positions early.

Conclusion: A Structured Approach to Volatility

In an era of geopolitical and monetary uncertainty, private credit offers a path to steady returns—but only for investors who prioritize selectivity, sector diversification, and structural safety nets. By leaning into Oaktree's favored sectors and avoiding crowded, trade-sensitive bets, investors can turn today's volatility into tomorrow's gains.

Final Take: The private credit market is no longer a niche playground. With yields in public markets near zero and geopolitical risks elevated, structured products like CLO equity and industrial CMBS are the new “blue chips” of credit investing. Stay disciplined, stay selective, and let the structure work for you.