Markets tightened significantly in 2024 across almost every asset class. In theory, this volatility should drive spreads wider, and we have already started to see the beginnings of that. In addition, there may also be points in time where capital markets execution might be more challenging, driving the need for private financing as an alternative.

There is real strength in the consumer asset class. In the US, we saw new issuance to the effect of $500 billion last year, increasing the total of household debt to levels around $18 trillion. Despite persistent inflation, the balance sheets of consumers in the prime category remained very strong. The subprime set has been under more pressure since the economy came out of the Covid pandemic and fiscal stimulus for borrowers started to subside. But as their financial performance declined, they also began to tighten their credit books. That development is transparent. Recession odds have increased substantially due to the introduction of higher-than-expected tariffs. So far, despite loan losses and delinquencies ticking up, the decline in credit performance has remained range-bound and within the expectations of the rating agencies, but we expect to see higher delinquencies and losses if unemployment rate increases. We still predict robust capital markets activity within the asset class.

For the most part, corporates have learned from experience when it comes to hedging their floating rate debt. For years, they didn’t do enough because it was such a benign environment. Now, they have gotten used to rates remaining higher for longer and put hedging programs in place – at least for some portion of their credit stack.

After the Great Financial Crisis, more and more corporate flows were diverted from the public to the private markets. This development really accelerated post 2015 and especially after the 2023 regional banking crisis. Instead of providing private credit directly to corporates ourselves, in Spread Products, for the most part, we provide leverage against private credit portfolios. We back several dozen asset managers and provide them with senior loan facilities against pools of private credit. Our footprint is weighed heavily towards North America, with an allocation of roughly 20 to 25% in Europe and a small percentage in Asia. The focus is on industries like healthcare and tech and not on cyclical sectors.

I’ll give you a hypothetical example: We would potentially take a pool of 50 private credit loans that’s diversified across multiple industries. If that pool had a value of $500 million, we would make a senior loan at notional of say, $350 million against it. That would give us 30% of subordination below us and a lot of protection in case credit quality declines. This is much more secure than making 50 loans individually.

The demand in the space is growing with the demand for private credit in general. For asset managers, this presents an opportunity to take an asset that yields SOFR plus 450 basis points and converts it into a product that yields mid-teens for their investors. In addition, we can securitize these assets and sell them to the capital markets as private credit collateralized loan obligations (CLOs). It was a record year for the CLO market in 2024 – we saw $510 billion in new issuance in the US alone. Meanwhile, Europe also saw the highest issuance ever. In addition to that, banks are refinancing existing deals at a much tighter spread.

Many companies are struggling with the high-rate environment. However, although top-line growth for companies in portfolios that we financed started to slow in 2024, they still delivered in line with our forecasts. Interest coverage ratios have stabilized. At the same time, private credit managers have raised a lot of capital through retail funds and insurance companies, which enables them to provide a strong competitive bid to the public markets. As the latter also recover, we are seeing a change with regard to who wins the most deals, obviously this market dynamic could shift again depending upon recent volatility.

They can offer borrowers and investors more flexibility – for example through delayed draw term loans, which enable borrowers to withdraw predefined amounts of a total pre-approved amount. Private credit managers have come up with other features like the ability for portable capital structures as well as offer speed to market. They will put together deals practically overnight and can pull together such a large quantum of debt compared to the public markets, which transacts with many players through much smaller ticket sizes per lender.

While it is true that many banks have recognized that asset-based lending is a very attractive and efficient way to participate in the growth of private credit, we have unique advantages. Our legacy as a leading global bank, being active around the world, provides us with a large network of private credit opportunities. We don’t have an asset management division that is competing with them. On the contrary, we are sourcing deals for them and tapping into our client base to meet their capital needs. Since we are very well integrated in different world regions, we are happy to not only finance, but securitize and back lever these opportunities. We have established ourselves as a player in ABF for multiple decades, and I expect Citi to remain strong.

Private credit players have developed partnerships with a large set of different banks to source or finance assets. Several of them have partnered with or even bought insurance companies and gained access to a lot of capital that way. That’s a big shift over the past decade, before which private debt managers had very specific yield targets in mind and were only active in a small subset of the capital structure. Now, their participation has broadened, especially in the US. In addition, these managers are making more headway in Europe, where their insurance accounts are increasingly accessing more securitized product. That just emphasizes the growth of this market.

Regulators will likely propose rules around the Basel III implementation anew, so the consequences for the market are tough to estimate. That being said, our expectation for the re-proposal of the rules is likely to remain relatively balanced. Banks will be required to lend with enough subordination in their private credit transactions and hold a certain quota of risk-weighted assets against their position, which is what we’re already doing. Banks have been active in this space for a long time. The way banks have maintained their books has been tested in multiple crises and regulators are quite comfortable with them.

The market for good office real estate has definitely come back. Right now, there is a pipeline of $10 billion in financing for properties in that segment and we see good leverage opportunities. While some bad office properties could potentially be converted into residential real estate, I believe that issues will remain in that market. Conduit office lease expirations will peak in 2025, so we’ll see modifications – extensions and liquidations. It does look like there will be a growing bifurcation between good and bad office. Investor demand was robust for CMBS through the first quarter. In the face of elevated supply, $45 billion across CMBS and CRE CLO, spreads held in very tight up until mid-March. High-quality office has been the leading property type in single-asset CMBS issuance year-to-date. Still, certain sectors showed softness, such as data centers on the DeepSeek news and Life Science office on oversupply.

The trend towards digital infrastructure had already begun when the new administration took office. We need infrastructure investments in the magnitude of $75 to $100 billion per annum in order to run big data models at scale, and data centers, chips and fiber cables are a central part of that. Large shares of that financing are achievable through the ABS market. In the world economy in general, basic infrastructure has been underinvested by governments that are over-levered. That’s why developers will turn to financing via the capital or private markets more and more.

A lot of the clients we interact with are private funds whose demand is fueled by their limited partners. And a big share of those are foreign investors from the Middle East, Asia, Europe, and Canada. So far, trade tensions have not impacted their appetite for investments in the US, but the long-term effect remains to be seen.

Most borrowers locked in extremely low rates and don’t want to refinance at elevated levels. At the same time, home prices are still extraordinarily high because there’s very little supply. Our mortgage strategists are calling for home price appreciation of 2.5% in 2025. That means that market activity is slow due to low affordability, not a lot of housing is changing hands. We also do not see a meaningful uptick in loan losses given borrowers still have a lot of equity built up in their homes. Investors are starting to price in a higher likelihood of a recession recently and there could be some headwinds for housing if the labor market weakens significantly from here.