AlbaCore Capital Group’s chief investment officer David Allen said the “pendulum effect” witnessed in structured credit this year, as the market allocates between debt and equity, prompted the firm to shift its focus to debt tranches and to be more “selective” in its approach to equity tranches.

In a credit market update, Allen said that within the liquid credit market, structured credit presented “the best opportunities to capitalise on the market volatility” during the second quarter.

Allen hailed “another record-breaking year” for the European collateralised loan obligation (CLO) market, as new issue volumes climbed to €30bn (£25.9bn) in the first half of 2025, up 24 per cent on the same period a year earlier.

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With supply beginning to weigh on new issuance spreads, however, AlbaCore had turned its attention to the primary market by June.

Allen observed that, as primary market spreads have softened, the market has swung back in favour towards debt investors, in what he called “the pendulum effect”.

According to Allen, when spreads widen, “value tends to move up the capital stack, and higher-yielding debt tranches may present risk-reward profiles that compare favourably to equity”, resulting in an increased allocation to debt. 

However, when spreads tighten, AlbaCore’s allocation “swings towards equity, as lower funding costs transfer value from debt to equity, creating an opportunity to lock in attractive financing and capture high excess spread and/or upside from loan appreciation”.

“The spread movement we’ve witnessed since February is a clear example of the pendulum in action, with value shifting from equity to debt,” said Allen. 

“As discussed in our Q1 letter, during the first few months of the year, the team invested in CLO equity as tight spreads created one of the most compelling equity arbitrage opportunities in more than five years. As spreads have widened, we have shifted our focus to debt tranches and are taking a more selective approach to CLO equity tranches.”

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AlbaCore’s Allen cited the need for “caution” in the current market environment, despite overall yields remaining attractive and fundamentals robust.

He said that spreads in the public credit markets are “again at relative tights in the syndicated credit markets”.

“Experience has taught us that reaching for risk to pick up incremental spread when overall markets are tight leaves investors vulnerable to any subsequent uncertainty or deterioration in credit conditions,” he added. 

“Instead, we remain focused on credit quality, using strong market conditions to reduce exposure to more cyclical or weaker credits and seeking to avoid borrowers with more binary outcomes.”

AlbaCore launched its first dedicated senior direct lending strategy in March, and since then, has been constructing the portfolio “with a focus on borrowers with defensive profiles and strong cash flow generation in non-cyclical sectors while avoiding borrowers with potential exposure to tariff risk”.

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