They Knew Nothing is New

When I joined a high yield team in 2003, I knew almost nothing about credit, which was inconvenient because the market was offering a crash course. Enron was gone, WorldCom had collapsed, and the dot-com wreckage was still fresh. Every weak business model suddenly became a credit problem.

The analysts I worked with were not asking the questions I expected. They were not debating growth rates, multiples, or price targets; they were asking the simpler and harder question of whether a company could survive. Could it make every coupon payment through a bad year, with the capital structure it actually had, rather than the one in the management presentation or the sponsor model?

That distinction still matters. Equity investors can afford some optimism because their upside is open-ended, but credit investors live with a different math. You can clip coupons for years and give it all back in one bad name, not because credit is broken, but because that is the structure of the asset class.

The best credit work I saw back then started with cash. Not EBITDA, not adjusted EBITDA, but cash. The analysts rebuilt working capital, maintenance capex, liquidity, maturities, and covenant headroom until they understood when the company might run out of money. A default does not happen when a company misses a consensus estimate; it happens when it cannot wire the cash.

That sounds obvious, but it is also the lesson markets keep trying to forget. Over the last fifteen years, leveraged credit has steadily moved away from those disciplines. Covenants became lighter, documentation became more flexible, and private credit moved more lending behind confidentiality walls where price discovery and public signals are weaker. The result is not necessarily worse credit everywhere, but it is certainly harder-to-read credit.

That matters now because the private credit market is large, more interconnected, and increasingly scrutinized by regulators. The Financial Stability Board recently warned that private credit’s links with banks, insurers, and private equity firms are deepening, creating potential vulnerabilities. Reuters also reported that more than 10% of private credit loans in MSCI data had been marked down by at least 50%, a sign that stress is no longer purely theoretical.

This is not a prediction of crisis. It is a reminder that credit cycles rarely announce themselves politely. They usually begin with a few “idiosyncratic” problems, then correlations rise, liquidity thins, and investors rediscover that leverage and asset volatility are not separate risks, but risks that multiply each other.

That was the lesson those 2003 analysts understood. A stable business and a cyclical business cannot carry the same debt load. A first-lien loan and a structurally subordinated claim are not the same exposure. A company with liquidity today can still be insolvent tomorrow if refinancing markets close. And a lender without timely information is not really being paid for patience; they may simply be late.

At Curasset, this is why we keep returning to valuation, structure, liquidity, and downside protection. Good credit investing is not about being permanently bearish. It is about knowing which risks you are taking, what can go wrong, and whether the spread is enough compensation.

Nothing in credit is ever truly new. The structures change, the language changes, and the distribution channel changes, but cash still pays bonds, leverage still magnifies mistakes, recoveries still depend on where you sit in the capital structure, and cycles still have a way of teaching old lessons to investors who thought they were optional.